New angel tax rules provide relief to eligible start-ups

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Centre’s notification exempts investments up to ₹25 crore in eligible firms and funding by non-resident Indians

The Centre on Tuesday notified new rules pertaining to angel tax which, will exempt registered start-ups of a specified size from the tax and any scrutiny to do with its applicability.

Angel tax is applicable to unlisted companies that have raised capital through sale of shares at a value above their fair market value. This excess capital is treated as income and taxed accordingly. This tax predominantly affects start-ups and the angel investments they attract.

According to Tuesday’s notification, investments of up to ₹25 crore in an eligible company will be exempt from the angel tax. In addition, investments made by a listed company of a networth of at least ₹100 crore or a turnover of at least ₹250 crore would also be exempt. Investments made by non-residents will also be exempt.

The notification said that an eligible start-up would be one that is registered with the government, has been incorporated for less than 10 years, and has a turnover that has not exceeded ₹100 crore over that period.

“It is a positive move by the government,” Bhavin Shah, Financial Services Tax Leader at PwC India said. “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 Alternate Investment Funds as well in the exclusion list, which has unfortunately not been considered favourably.”

In order to register with the government as a start-up, the company will also have to make an online application to the Department for Promotion of Industry and Internal Trade (DPIIT).

This application will have to be accompanied by a copy of the Certificate of Incorporation or Registration, a write-up about the nature of the business highlighting how it is working towards “innovation, development or improvement of products or processes or services, or its scalability in terms of employment generation or wealth creation.”

Welcoming the move, the start-up community said some issues such as start-ups having already been sent tax notices, and the applicability of Section 68 of the I-T Act still remained and that they would take it up with the tax department.

Fast track disposal

“We will also make a submission to CBDT soon and request them to drive fast track disposal for start-ups having cases under appeal with exemption to be considered and any possible consideration for orders under Section 68 where PAN of investors have been furnished to be included in CBDT’s instructions to assessing officers,” Sachin Taparia, founder of LocalCircles, said.

The start-up will also have to attest to the fact that it has not invested in any land that is not being used in its ordinary course of business, any vehicle over the value of ₹10 lakh, any jewellery, among other things.

Many of the concerns raised by the start-ups have been addressed in the recent notification,” S. Vasudevan, partner, Lakshmikumaran & Sridharan Attorneys, said. “However, the notification imposes certain restrictions on investments by the start-ups. Some of these restrictions can lead to hardships for the start-ups and may even disqualify some genuine start-ups from this exemption.”

Once the signed declaration and accompanying documents are submitted to the DPIIT, the body will decide on the eligibility of the start-up and then communicate a list of eligible start-ups to the Central Board of Direct Taxes.

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