The government on, Thursday, exempted some start-ups from angel tax, but did not abolish it. The start-up industry was hoping that the tax would be abolished to bolster investments.
Department of Industrial Policy and Promotion, under the Union Ministry for Commerce and Industry, issued a notification on April 12, defining start-ups, specifying the conditions under which exemption is applicable and conditions under which angels can buy shares in the start-ups.
“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,” the department said in a statement.
Definition of start-up
Seven year old companies with a turnover equal to or less than Rs 25 crore are considered as a start-up.
According to DIPP, an entity shall cease to be a start-up on completion of seven years from the date of its incorporation/ registration or if its turnover for any previous year exceeds Rs 25 crore. In the biotechnology sector, an entity shall cease to be a start-up on completion of ten years from the date of its incorporation/ registration or if its turnover for any previous year exceeds Rs 25 crore
What is angel tax?
A tax levied on any capital raised by a closely-held company which is above its fair market value. This capital is treated as income from other sources under Section 56(2)(viib) of the Income Tax Act, 1961.
Who is exempt?
- Startups incorporated before 2016 that have received up to Rs 10 crore in angel funding will not have to pay angel tax. This is applicable to companies with a revenue of less than Rs 25 crore.
- Such companies can apply to an eight-member inter-ministerial board (IMB) for tax relief (the aggregate amount of paid-up share capital and share premium of the start-up after the proposed issue of shares does not exceed Rs 10 crore)
Who can fund?
Angel investor, picking up stake in a startup, will need to have a minimum net worth of Rs 2 crore and should have an average annual income of Rs 25 lakh while filing tax returns in the preceding three years.
Fresh concerns
The notice has clarified some doubts but has raised fresh concerns about the red tape like the approval from the IMB which might delay the process. A merchant banker will also need to certify the valuation.
Angel tax was first introduced by the previous government in 2012. It was done to to fix a loophole that enabled money laundering by investors who put in money before taking it out at a high premium.
In February this year industry body NASSCOM, TiE Mumbai and Indian Angel Network issued a joint statement requesting the government to do away with angel tax.