Clearing the air on discrepancies around fair market-value of startups that led to these companies being sent tax notices, the Centre has done away with the requirement for startups to have the fair market-value of their shares ascertained by a merchant banker. In April last year, the government gave relief to startups by allowing them to avail income tax concession given they met certain criteria. In a notification released on Wednesday, the Department of Industrial Policy and Promotion (DIPP) amended the April rules and relaxed the procedure for seeking income tax exemptions by startups on investments from angel funds.
Notably, entities requesting tax exemptions still need to provide a justification for valuation of shares “along with supporting documents”.
The move has come in backdrop of the startup community claiming receipt of notices under Section 56(2) (viib) of the Income Tax Act from the tax department to pay taxes on investment by angel funds. Entrepreneurs have raised concerns over these tax notices. However, DIPP said that the new rules would apply for startups seeking exemptions after the issuance of Wednesday’s notification and would not apply on those entities who have already sought exemptions and have received notices from tax authorities.
Under the Section 56(2)(viib) of the Income Tax Act, closely-held companies, when issuing shares, are charged 30 per cent tax on the difference between funds raised as per the actual valuation and the fair-market value of the company. This, within the startup community, is known as the angel tax.
However, startups with angel investment following certain
criteria are allowed to seek exemption from this tax. For this, the aggregate amount of paid up share capital and share premium of the startup after the proposed issue of share should not exceed Rs 10 crore. Further, the investor should have returned income above Rs 50 lakh or net worth above Rs 2 crore for the financial year preceding the investment. Earlier, the minimum returned income requirement for investors was Rs 25 lakh.
According to sources, the Central Board of Direct Taxes (CBDT) is expected to come up with a separate clarification on the angel tax issue. Industry think-tank iSPIRT has reportedly written to Prime Minister Narendra Modi urging the government to abolish tax on angel investments that has “victimised” many startups and poses a “serious threat” to the Start Up India movement. iSPIRT, representing more than 60 startups in its letter, highlighted that in the last two years, many startups that have raised angel funding in AY2015-16 and 2016-17 have received notices from the Income Tax department under Section 56(2)(viib) of the I-T Act.
As per the Commerce Ministry’s notification on Wednesday, the CBDT has been mandated to decide on the exemption requests within a 45-day deadline. Instead of sending their applications to an inter-ministerial board of certification, the startups now need to send their requests to the DIPP, which will then forward them to the CBDT. These new norms are likely to encourage startups to get exemptions as many of them earlier refrained from seeking this benefit due to documentation processes.
Earlier this month, Minister of Commerce and Industry Suresh Prabhu had acknowledged that startups were facing some difficulties due to the angel tax and he has taken up the issue with the finance ministry. “I want to assure you that we are working with the finance ministry in order to find the appropriate solution to angel tax and I am quite confident that we will come up with a solution soon,” he had said.
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