Start-up definition, angel tax threshold expanded

Andrew Cummings
February 22, 2019

The Rs 25 crore threshold is wide to cover nearly all angel investments as majority are less than this number. An entity can now be termed a startup up to 10 years (up from 7 years) since the date of incorporation, provided it has not crossed Rs 100 crore in revenue in a single year.

"An entity shall be considered a Startup if its turnover for any of the financial years since its incorporation/registration hasn't exceeded ₹100 crore instead of existing ₹25 crore", said Prabhu.

Union Minister for Commerce and Industry Suresh Prabhu has cleared a proposal to simplify exemptions for startups under Section 56 (2) (viib) of the Income Tax Act, according to a release from the Commerce Ministry.

Easier rules follow concerns over tax notices to more than 150 startups on their angel funding.

The notification, however, exempts investments from non-residents, Category I Alternative Investment Funds registered with the markets regulator, and listed companies with a net worth of Rs 100 crore or turnover of at least Rs 250 crore provided that its shares are frequently traded as per SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

Once the signed declaration and accompanying documents are submitted to the DPIIT, the body will decide on the eligibility of the start-up and then communicate a list of eligible start-ups to the Central Board of Direct Taxes. A start-up also can not make any capital contribution to any other entity or invest in shares, car, any vehicle or mode of transport that costs more than Rs 10 lakh.

Commenting on the move, Padmaja Ruparel, Co-Founder, Indian Angel Network (IAN), said this will unshackle angel investing and bring in domestic monies for startups.

Giving a major relief to startups, the government has made a decision to relax angel tax norms for startups, including increasing the investment limit to Rs 25 crore for availing income tax concessions by startups, an official said today. "This is a seminal move for angel investing..." she said. There will be no case to case examination of startups for exemption and that the valuation of shares is no more a criterion for exemption of investments into eligible startups.

"The stated exemptions may provide much-needed relief to the relatively larger-sized startups who may have been required to pay tax on premiums received on share subscription", said Vasudevan of Lakshmikumaran & Sridharan Attorneys. Founders said that it could dry early-stage funding that is necessary to build a startup ecosystem and lead to exodus of new ventures from India.

However, it will not be applicable to companies that have received demand notices from the Income Tax department, clarified CBDT member Akhilesh Ranjan.

To be exempted from angel tax, start-ups will have to submit self-certified declaration along with audited financials and income tax returns of the previous year, Mr Prabhu said.

Such taxation, dubbed as angel tax, has remained a vexed issue with many start-ups accusing the tax department of high-handedness and scaring away angel investors.

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