After representations by many business groups, the government Tuesday exempted startups from ‘angel tax’ on funds they have raised from investors in the last up to seven years. The decision is expected to stop companies considering migration to other destinations, and boost investments into startups.
The Commerce and Industry Ministry issued a notification to simplify the process for startups to receive tax exemptions under an anti-evasion provision of the Act. This provision, Section 56(2)(vii)(b), deals with taxation of share premiums received in excess of the fair market value. The Central Board of Direct Taxes will notify the changes separately.
The move follows concerns raised by many regarding the taxation of angel investments in the startup ecosystem. Industry organisations had written to the Prime Minister in January pointing out that many startups had received tax notices in the previous months to pay a penalty on top of a 30 per cent tax on funds they raised in the last up to seven years.
Around 73 per cent of startups that had raised angel capital had received demand notices from the tax department, said Sachin Taparia, founder of online citizen engagement platform LocalCircles.
“Definition of startups has been widened,” Commerce and Industry Minister Suresh Prabhu tweeted on Tuesday. The changes will be applicable to over 16,000 startups already registered and recognised by the government as well, according to Ramesh Abhishek, Secretary, Department for Promotion of Industry and Internal Trade (DPIIT).
According to the notification, eligible startups will receive tax exemptions on funds raised up to Rs 25 crore for shares issued or proposed to be issued to angel investors. Besides this, any money received for shares issued to a listed company with a net-worth of Rs 100 crore or turnover of at least Rs 250 crore will also be exempted, said Abhishek.
“The Rs 25-crore limit will take care of all investments of promoters, relatives, friends, angel investors and beyond,” he said.
“I am absolutely delighted that the government has in effect abolished angel tax for startups,” said Saurabh Srivastava, chairman emeritus, TiE Delhi-NCR. “Angel tax had begun to dampen the enthusiasm of angel investors and startups, who had begun migrating abroad…This (announcement) will transform India’s economy, generate millions of jobs and solve India’s pressing challenges in healthcare, education, agricultural productivity, clean energy and much more,” he said.
Firms can get back to business, may create more jobs
Pressure of tax litigation on startups will ease. Taxing money received as share premium from angel investors had dampened sentiments in the entrepreneurial digital and services ecosystem. Expanding the definition of startups will also help these firms plough back money into their venture, expand and grow, and, hopefully, create more jobs.
Investments into eligible startups by non-residents and venture capital company or fund will also be exempted beyond the Rs 25 crore limit under this section of the Act, according to the notification. An entity will be recognised as a startup for up to 10 years from the date of its incorporation or registration instead of the existing duration of seven years.
“The latest notification will solve 90 per cent of the problems faced by startups in India,” said Taparia. The move will not only benefit over 16,000 startups employing around 3 lakh people, but is also expected to recognise another 10,000 companies set up between 2009-2011 as startups and allow them these tax benefits as well, he said. This is also applicable to entities with a turnover of up to Rs 100 crore for any of the financial years since its incorporation or registration. Earlier, an entity whose turnover exceeded Rs 25 crore for any financial year was not considered a startup. A startup will be eligible for these exemptions if it is a private limited company recognised by DPIIT.
However, it will not be applicable to companies that have received demand notices from the Income Tax department, clarified CBDT member Akhilesh Ranjan. In this case, entities are expected to follow the recognised process of filing an appeal, and tax officers have been given instructions not to initiate recovery of the assessed demand, he said. They have also been instructed to resolve the appeals at the earliest, he added.
“This clarification would help in avoiding potentially significant tax challenges faced by startups … There was a request from the industry to include category II AIFs as well in the exclusion list, which has unfortunately not be considered favourably,” said Bhavin Shah, FS Tax Leader, PwC India. These entities must not be investing in assets like building or land, other than that used for the purposes of renting or held by the startup as stock-in-trade “in the ordinary course of business”. They must also not invest in loans and advances, unless lending money forms a “substantial” part of their business.
To be eligible for these exemptions, the entity must not participate 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.