Govt redefines startup’s definition to provide relief from angel tax

While addressing the raging issue of angel tax, the Minister for Commerce and Industry Suresh Prabhu was reported saying that an entity shall be considered a startup upto 10 years from its date of incorporation, i.e, registration instead of the existing period of 7 years.

The minister had taken up the issues with the officials and in fact a roundtable was also organised on February 4 under the chairmanship of DPIIT which was reported to be attended by a host of startups, angel investors and other stakeholders to discuss the new measures on the contentious angel tax issue. As per news reports, the proposals aims to simplify the process of exemption for Startups under section 56 (2) (viib) of the Income Tax Act.

Suresh Prabhu highlighted that, “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 the existing ₹ 25 crore.” He further added that the consideration of shares received by eligible startups for shares issued or proposed to be issued by all investors shall be exempted up to an aggregate limit of ₹ 25 crore.

According to reports, the concerns have been raised by the industry earlier on taxation of angel investments and other issues that need urgent attention for availability of capital to startups. In his report, the minister added that, “all investments into eligible Startups by Non-Residents, Alternate Investment Funds- Category I registered with SEBI shall also be exempted under Section 56(2)(viib) of Income Tax Act beyond the limit of Rs 25 crores.”

As per news reports, funds from angels are subjected to over 30% tax if it is more than the fair market value (FMV). Moreover, introduced in Section 56 of the I-T Act in Budget 2012, it explicitly states that companies from mature private enterprises to small startups – are liable to pay taxes on money invested at capital.

Though, most startups taking years just to break-even, treating part of the hard-won cash that came in from angels as taxable income, even before a company begins to make money seems unwarranted.

“Doing away with the Angel Tax for Start-ups was a much needed and long pending correction. We are glad that the decision to discard it has been made in the larger interest of the thriving Start-up community. We thank the Hon’ble Union Minister of Commerce & Industry and Civil Aviation – Shri Suresh Prabhu for bringing about this change. The decision will help Start-ups to focus on scaling up their projects while the VCs and investors will be able to invest in the projects with a view on the long-term. Start-ups will now be in a better position to consolidate and eventually may go on to become successful companies. A long term approach always helps generate all-round development and healthy returns for all the stakeholders in the enterprise. This development will help Start-ups become employment and revenue generators. The prosperity of the Start-up ecosystem is a definite boost to the Indian economy, to technology development, and to net-worth building. It will help create conducive business environment for innovation and growth in the country,” says Mr Rajan Sharma, Founder & CEO, excess2sell.

A few conditions are still hidden, a startup will only be eligible for the exemption if it is a private limited company which is recognized by DPIIT. In fact it should not be investing in building or land appurtenant thereto; land or building, or both, not being a residential house; loans and advances, other than those extended in the ordinary course of business; capital contribution made to any other entity; shares and securities; a motor vehicle, aircraft, yacht or any other mode of transport.

The actual cost of which exceeds ten lakh rupees, other than that held by the startup and the jewellery other than that held by the startup as stock-in-trade in the ordinary course of business.

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