Finally, start-ups get 100% tax relief on investment from angel, other investors

The government has allowed full tax concession to start-ups up to an investment of Rs 10 crore. Till now, the IT department could make tax demands under Section 56 of the IT act

Earlier there were no provisions for angel investors. ... For the purposes of Section 56, there is no restriction on class of investors and eligible start-ups can receive investment from any person against issue of shares

Ramesh Abhishek
Secretary, DIPP

In a major relief to budding entrepreneurs, the government has allowed start-ups to avail full tax concession on investments up to Rs 10 crore from investors, including angel financiers. The decision would address a key issue faced by angel investors who put money in start-ups during early growth stage, and would also provide level-playing field for all investors.

The commerce and industry ministry came out with a notification saying a start-up can apply for seeking tax concession under Section 56 of the IT act. Section 56 provides for taxation of funds received by an entity.

According to the notification, an angel investor with a minimum net worth of Rs 2 crore or an average returned income of over Rs 25 lakh in the preceding three financial years will be eligible for 100 per cent tax exemption on investments made into start-ups above fair market value. “With the introduction of amendments through this notification, start-ups are likely to have an easy access to funding, which in turn will ensure ease in starting of new businesses, promoting start-up ecosystem, encouraging entrepreneurship, leading to more job creation,” the ministry said in a statement.

Several start-ups had raised concerns over taxation of angel funds under Section 56 of the Income Tax Act, which provides for taxation of funds received by an entity. As many as 18 start-ups have got notices from tax authorities. This section provides that where a closely held company issues its shares at a price more than its fair market value, the amount received in excess of the fair market value will be charged to tax the company as income from other sources.

Elaborating on the matter, the secretary in the Department of Industrial Policy and Promotion (DIPP) Ramesh Abhishek said that the main objective was that risky and genuine investments by angel investors should not be taxed under Section 56. “Earlier there were no provisions for angel investors. Now we have brought that clarity. For the purposes of Section 56, there is no restriction on class of investors and eligible start-ups can receive investment from any person against issue of shares,” he told reporters in New Delhi. He clarified that a start-up incorporated before April 2016 can seek exemptions from Section 56 of the Income Tax Act.

However, the three-year income tax concession will be available to only those that are incorporated after 1 April 2016 and before April 2021.

When asked about the reason for seeking some information regarding investors, he said these are basic details and any investor would have no problem in providing that.

Start-ups also enjoy income tax benefit for three out of seven consecutive assessment years under Section 80-IAC of the act.

To avail both the concessions (under Sections 56 and 80-IAC of the Income Tax Act), start-ups will have to approach an eight-member inter-ministerial board of certification. “DIPP has issued gazette notification…constituting a broad based inter-ministerial board to consider applications of start-ups for claim of following incentives of the IT Act, 1961,” it added.

The secretary said that the board would dispose applications in a time bound manner and for that it would soon issue guidelines. DIPP will allow in a weeks time to apply for these concessions.

The ministry said these amendments are introduced to address key demands of start-ups with regard to exemptions under the IT Act. Start-ups in the recent past have flagged their grievances to the government regarding angel tax provision, which they considered was not friendly to them.

An angel investor is the one who puts funds in a start-up when it is taking baby steps to establish itself in the competitive market. Normally about 300-400 start-ups get angel funding in an year.

Their investment in a unit ranges between Rs 15 lakh to Rs 4 crore.

The government has so far extended tax benefits to just 88 start-ups out of 8,765 that have been recognised by DIPP since January 2016. The government launched the Startup India initiative on 16 January 2016 to build a strong ecosystem for nurturing innovation and entrepreneurship.

Commerce and industry minister Suresh Prabhu said that start-ups can claim exemption from levy of income tax on share premium received by eligible start-ups. “We are taking several efforts to foster the entrepreneurial ecosystem in the country. A broad based Inter-Ministerial Board has been set up to consider applications of startups for claim of following incentives of the Income Tax Act,” he said in a tweet.

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