Angel Tax breather

The government announced a series of changes aimed at freeing investors and entrepreneurs from the so-called angel tax that’s roiled India’s startup ecosystem. It raised the exemption threshold and kept investments by listed companies of certain minimum size, venture capital funds and non-residents in startups outside the ambit of the tax. The move is expected to bring relief to 16,000 companies that are registered as startups with the Department of Investment and Internal Trade.

A notification issued by the government also widened the definition of startups to benefit a larger number of innovators and protect them from the tax. An entity that has been in operation for up to 10 years from its date of incorporation or registration will be considered a startup instead of the current seven years. A firm can be a startup if its turnover for any of the financial years since its incorporation hasn’t exceeded ₹100 crore against the existing cap of ₹25 crore.

The investment limit was raised to ₹25 crore from ₹10 crore now for availing of tax exemption.

Under Section 56(2), when a closely held company issues shares at a price more than its fair market value, the difference is treated as income from other sources and taxed accordingly. This section, introduced as an anti-abuse measure by then finance minister Pranab Mukherjee in 2012, came to be dubbed the angel tax due to its impact on such investments in startups.

The ₹25 crore limit will exclude funds from certain sources. These include non-residents, Category 1 registered alternative investment funds and frequently traded listed companies with a net worth of ₹100 crore or turnover of at least ₹250 crore.

The development comes in the wake of startups having been served demands for taxes on angel funds received by them. The commerce and industry ministry had told the finance ministry that the tax was a major impediment to the flow of investments into startups, which is a key element of the government’s employment-generation strategy.

CBDT member Akhilesh Ranjan said that the new norms don’t address cases in which tax demands have already been raised.

However, Ranjan said if the government later finds any case of money laundering, then the exemption would be revoked and tax would be imposed but scrutiny would not be related to Section 56.

Both the increase in investment limit to ₹25 crore and self declaration procedure with DPIIT are game changers for the startup fraternity, said Venture Catalysts cofounder Anuj Golecha.

An entity will also be eligible for exemption if it’s a private limited company recognised by DPIIT and is not investing in specified asset classes. However, for being eligible for exemption under Section 56(2)(vii)(b), a startup should not be investing in immovable property, transport vehicles above ₹10 lakh, loans and advances, capital contribution to other entities and some other assets except in the ordinary course of its business. Startups only need to furnish a self-declaration that they are not involved in any of these activities beyond the ordinary course of business.

To avail of these concessions, eligible startups will have to file a duly signed self-declaration with the DPIIT. The department will then transmit these declarations to CBDT.

The valuation of shares is also no longer a criterion for exemption of investments in eligible startups under Section 56. There is no need to separately apply for exemption under the section and there will be no case-to-case examination of startups.

The department will conduct a round table with stakeholders on March 1 on the next set of reforms, ways to augment investment in startups, incentivise angel investment and explore the concept of accredited investors.

Abhishek said the DPIIT will develop a mechanism so that the self-declarations can be directly sent to the CBDT.

No comments: