In a move that could make leveraging of start-ups easier, the government has removed the ‘angel tax’ levied on a firm if investments made in it by an Indian resident exceed the fair value of the firm’s shares.
The Central Board of Direct Taxes (CBDT), via a notification of June 14, made changes in Section 56 (2) of the Income Tax Act to implement the same.
Under Section 56 (2) (viib) of the Income Tax Act, if an Indian company receives share subscription amount from an Indian resident which exceeds the fair market value of shares, the excess amount is taxed in the hands of the Indian company as “income from other sources”.
Start-ups are valued on the basis of their future growth prospects and due to the rigorous provisions of Section 56 (2) (viib), any amount received in excess of the fair market value was getting taxed at as high as 30%. Such a high tax was seen as a big deterrent to investments in domestic funds.
In January, Prime Minister Narendra Modi had unveiled a slew of incentives to boost start-up businesses, offering them a tax holiday and inspector raj-free regime for three years, capital gains tax exemption and `10,000 crore corpus to fund them. CBDT has in this line exempted start-ups from this tax by including start-ups in this “class of persons”.
Providing the much-awaited boost to the resident ‘angel’ investors, domestic family offices or domestic funds which were not registered as venture capital fund, CBDT has exempted them from the tax levied on receipt of investment.
“Removal of this so-called ‘angel tax’ was much awaited and is a welcome move since valuation of start-ups which is based on the value of the promising idea is far higher than its fair value, resulting in a huge tax outgo. Abolition of ‘angel tax’ was a long-standing wish of the start-up industry and by answering this wish, the government has given the promised impetus to boost start-up businesses in India,” said Rakesh Nangia, managing partner, Nangia & Co.
In India, a firm qualifies to become a start-up if it meets the criteria laid down by the department of industrial policy and promotion (DIPP) put in place on February 17. It says that a firm would be considered a start-up if it is incorporated or registered in India not prior to five years, with an annual turnover not exceeding `25 crore in any preceding financial year.
At the same time, a start-up are should be working towards development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property.