Startups with less than Rs10 cr Funding can seek Exemption from Angel Tax [Read Notification]

The Department of Industrial Policy and Promotion recently notified a new amendment for easing the norms of startups funding. Startups with less than Rs10 crore Funding can seek Exemption from Angel Tax from an eight-member government board under Section 56 of the Income Tax Act.

The government has also constituted a board that will have representation from the Reserve Bank of India, stock market regulator Sebi, Central Board of Direct Taxes and the relevant ministries.

Mainly Angel Tax rose to make the private companies matured and also to small startups that took early-stage investments from residents in India. Angel Tax is the amount raised excess to the fair value of share held by the private company which is taxable under “Income from other sources” under Section 56 (ii) of the Income Tax Act.

The notification clarified the issue of taxation in angel investment in start-ups who have been complaining about the tax on investment raised from the startups. The said notification issued on 11th April 2018 which specifies the conditions availing for tax exemptions.

As per the new amendment startups which are incorporated or registered before 2016 that have received up to Rs. 10 crores in angel funding are exempted from taxation and the same will apply only to those companies with revenue of less than 25 crores. The notification also exempted share premium received by eligible startups from the income tax ambit.

This will ease the concerns of about 300 startups that received funding from the Angel Investors Network.

Angel tax is being created the hindrance for the startups over fund raised from the friends and families by the young entrepreneurs and also to those who are not registered with the markets regulator or as Alternative Investment Funds (AIFs).

The fund raised by a private company by way of issuing equity shares are covered under angel tax to the extent of the amount raised in excess of fair market value.

“With the introduction of amendments through this notification, startups are likely to have easy access to funding which in turn will ensure ease in starting of new businesses, promote startup eco-system, encourage entrepreneurship leading to more job creation and economic growth in the country,” DIPP reportedly said in a statement.

The startups were demotivated with the hit of notice from Income Tax department and which resist them to do business. As per the new notification which gives relief to the angel investors by giving 100% exemption to the limited liability partnership incorporated on or after the 1st day of April 2016 but before 1st day of April 2021, can claim 100% tax exemption on profits for three out of seven years, as per the prescribed norms.

There are many restrictions that might be involved in getting funding. For every infusion need approval from the inter-ministerial board which in turn could delay the process. A merchant banker will also need to certify the valuation.

The angel tax was introduced by the Finance Minister Pranab Mukherjee in the finance bill of 2012. The measure was aimed at tackling the laundering of money through high premiums on shares. The tax is applicable on the capital raised by unlisted companies in excess of the fair market value.

In 2016, the Government has decided to remove “angel tax” for investors providing funding to startups. The Prime Minister announced the Government-approved plan of granting relief to funding to startups. This is with an ambitious plan to boost startups and thereby to promote entrepreneurship and job opportunities in India. Resident angel investors, domestic family officer’s domestic family offices or funds which were not registered as VC funds have been excluded from tax.

As per the notification which explains that an entity shall cease to be a startup on completion of seven years from the date of its registration or its turns over exceed 25 crores. But in the case of startups in the biotechnology sector, the period of startups ends with the completion of ten years from the date of its registration or if its turnover for any previous year exceeds Rs. 25 crores.

This notification issued by Department of Industrial Policy and Promotion shall come into effect on the date of its publication in the Official Gazette.