The government on Thursday granted relief to eligible start-ups from the so-called angel tax if they have received funds up to a certain limit, seeking to address a major concern of budding entrepreneurs.
In a gazette notification, the Department of Industrial Policy and Promotion (DIPP) said start-ups can apply to an eight-member inter-ministerial board (IMB) for tax relief if “the aggregate amount of paid-up share capital and share premium of the start-up after the proposed issue of shares does not exceed Rs10 crore”.
As many as 18 start-ups have received notices for the “angel tax” under Section 56(2)(viib) of the Income Tax Act, 1961. This section seeks to tax any capital raised by a closely-held company which is above its fair market value as income from other sources.
According to Thursday’s notification, the investor, who proposes to subscribe to shares issued by a start-up, must have an average returned income of Rs 25 lakh or more for the preceding three financial years or the net worth of Rs 2 crore and above as on the last date of the preceding fiscal. Also, the start-up has to obtain a report from a merchant banker specifying the fair market value of shares in accordance with relevant income tax rules.
The IMB, to be headed by an additional secretary at the DIPP, will have members from the ministries of finance, corporate affairs, science and technology, electronics and IT, bio-technology, the RBI and Sebi.
Last week, a government official said angel funding for start-ups had mostly been in the range of just Rs 3-4 crore. The idea behind this relief for start-ups is that an investor who is already investing in a risky venture shouldn’t be taxed. This tax was introduced in 2012 to check conversion of black money into white through high premiums on shares. The latest notification says any entity that focuses on innovation, among others, will remain a start-up for seven years from the date of incorporation unless its annual turnover breaches Rs 25 crore. FE