Start-ups get angel tax relief

In what is being viewed as a breather by start-ups, the government on Tuesday relaxed tax norms and announced various other measures to give a boost to entrepreneurial activity.

The investment limit for angel tax exemption has been raised to Rs 25 crore and from Rs 10 crore earlier and the need for approval of exemption from angel tax every time the start-ups raised funds has been done away with. This tax, which is levied at 30% on investments made by external investors, had become a raging issue with taxmen issuing notices to start-ups.

Further, the definition of a start-up has also been widened by raising the turnover limit for an eligible start-up to Rs 100 crore from the earlier Rs 25 crore. Also, now businesses or ventures will be considered a start-up up to 10 years from the date of incorporation against the earlier seven years.

Climbing down a little on the issue of fair market value (FMV), the commerce ministry has exempted consideration for share sale, including premium up to Rs 25 crore, from the provisions of Section 56 (2) (viib) of the Income Tax Act. This section is used to tax share premium in excess of fair market value.

Commerce minister Suresh Prabhu tweeted on Tuesday, "Delighted to inform you that a Gazette Notification will be issued today simplifying the process for start-ups to get exemptions on investments under Section 56(2)(VIIb) of Income Tax Act, 1961".

The Department for Promotion of Industry and Internal Trade (DPIIT) notification offers relief to eligible start-ups on share premium received by them if they were registered with it.

However, the government has attached conditions for exemption from angel tax. It has barred start-ups from investing the share premium in land or residential building other than those held as stock in trade or occupied, rented or used by the business or in shares and securities, jewellery or in vehicles priced above Rs 10 lakh other than those used by the entity in the ordinary course of business.

Start-ups have also got an exemption from angel tax for receipts they get from share sales to listed companies with a net worth of Rs 100 crore or sales of Rs 250 crore. They will also not have to pay the levy on premium received from non-residents and alternative investment funds, Category 1, registered with the Securities and Exchange Board of India.

A statement issued by the National Association of Software and Services Companies (Nasscom), which had called for abolition of angel tax provisions said, it was "a step in the right direction."

"The issue of angel tax has been a continuous issue for the overall growth of Indian start-up ecosystem and ease of doing business. Nasscom had earlier raised specific concerns towards the abolition of angel tax provisions to boost investments in start-up ecosystem. The new notification is a seminal move from the government for angel investing and a step in the right direction towards the foundation of Start-up India 2.0," said the representative body for Information Technology (IT) and start-ups.

The statement issued by the commerce ministry mandates start-ups to file a "duly signed declaration with DPIIT for availing exemption". This will be passed on by the DPIIT to the Central Board of Direct Tax (CBDT).

Sunil Goyal, managing director, YourNest Venture Capital, said the moves were in the right direction but took two steps backwards too.

"Appreciate another effort to exempt genuine start-ups from the angel tax, with higher limits and better guidelines. With this start-ups can apply to CBDT in advance and seek an exemption. While the step is in the right direction, but with two steps backwards too. It stops the start-up to invest in its subsidiaries or make equity investments even in the ordinary course of business."

Rohinton Sidhwa, partner, Deloitte India, applauded the government's realisation that traditional valuation cannot be "applied to start-ups".

"This concession is finally a recognition that the traditional valuation mechanisms that were prescribed earlier can simply not be applied to start-ups. The turnover exemption will also provide relief to a significant proportion of the smaller start-ups that were being targeted previously by the notices issued. The specific tax avoidance that the provision sought to cover can still be targeted under the GAAR. Hence, this concession is a business-friendly/start-up friendly resolution to a controversy that has created uncertainty in the minds of promoters and investors alike," he said.

Jayant Jha, CEO of Yaantra, said the turnover capping was flawed as it discouraged early scaling up of sales by new ventures.

"Capping (turnover at) Rs 100 crore may not be a good idea, as start-ups who surpass this as early as possible will create sustainable opportunities i.e, employment etc, for the ecosystem and such efforts must be incentivised," he said.

Bhavin Shah, FS tax leader, PwC India, said the latest clarification will allow start-ups to focus on their core activities.

"This clarification would help in avoiding potentially significant tax challenges faced by start-ups and allow them to focus on their core activities. There was a request from the industry to include category-II AIFs (alternative investment funds) as well in the exclusion list, which has unfortunately not be considered favourably," he said.