In a move expected to provide relief to and boost investments into startups in India, the government has decided to simplify the process for them to get exemptions under the Income Tax Act.
The commerce and industry ministry said Tuesday that a simpler way of granting tax exemption to startups under an anti-evasion provision dealing with the issue of taxation of share premiums received in excess of the fair market value will be issued today. The move, which is to ensure availability of funds for startups, follows concerns regarding the taxation of angel investments in this sector. The Central Board of Direct Taxes will notify the changes separately.
“Delighted to inform you that a Gazette Notification will be issued today simplifying the process for startups to get exemptions on investments under section 56(2)(viib) of Income Tax Act, 1961,” commerce and industry minister Suresh Prabhu said in a tweet Tuesday. “Definition of startups has been widened,” he added.
According to him, the government will now recognize an entity as a startup up to 10 years from the date of its incorporation or registration instead of the existing duration of seven years.
An entity will also be considered a startup if its turnover for any of the financial years since its incorporation or registration does not exceed Rs 100 crore. Earlier, an entity was no longer considered a startup if its turnover for any financial year exceeded Rs 25 crore.
Considerations of shares received by eligible startups for shares issued or proposed to be issued by all investors shall be exempt up to an aggregate limit of Rs 25 crore, Prabhu stated.
In addition, consideration received by eligible startups for shares issued or proposed to be issued to a listed company having a net worth of Rs 100 crore or turnover of at least Rs 250 crore will also be exempted.
Investments into eligible startups by non-residents, SEBI registered alternative investment funds-category I will also be exempted under Section 56(2)(viib) of the Income Tax Act beyond the Rs25 crore limit, according to Prabhu.
A startup will be eligible for exemption under Section 56 (2) (viib) of Income Tax Act if it is a private limited company recognised by the Department for Promotion of Industry and Internal Trade (DPIIT).
These entities must not be investing assets like building or land, other than that used by the startups for the purposes of renting or held by it as stock-in-trade “in the ordinary course of business”. They must also not invest in loans and advances, other than those extended in the ordinary course of business where lending money forms a “substantial” part of the startup’s business.
In order to be eligible for these exemptions, the entity must not be participating in capital contribution made to any other entity, and it should not be invested in shares and securities. It should also not have invested in a motor vehicle, aircraft, yacht or any other mode of transport that costs more than Rs 10 lakh, other than vehicles used for the purpose of plying, hiring, leasing or as stock-in-trade.
Investments in jewellery, other than those held as stock-in-trade in the ordinary course of business, will also not be considered for exemptions.
“Start-ups will file a duly signed declaration with DPIIT for availing exemption. The declaration will be transmitted by DPIIT to CBDT,” stated the ministry in its release.