Union Budget 2019 India: Finance minister Nirmala Sitharaman has proposed an array of tax reliefs to the start-up fraternity, which were long awaited. The Angel tax, introduced by the Budget 2012, has been a major concern. It is a tax levied in the hands of an unlisted company that has raised capital at a value exceeding its fair market value, determined as per the valuation methodology prescribed under the Income Tax rules. Excess of such share issue proceeds over and above the fair value is taxable in the hands of the recipient company.
Start-ups rely heavily on funding from the angel investors and venture capital groups. Taxation of such investment discourages the investor community from investing in new businesses resulting in driving away the much needed fund-flows.
The government through a subsequent notification provided exemption to ‘Eligible Start-ups’ which raised funds from Category-I Alternate Investment Funds (AIFs), from the applicability of the said provisions and thereby doing away with the requirement of obtaining a valuation report for issue of shares.
Watch FE Explained video: What is Union Budget?
This exemption, while welcomed by the investor community, faced two major hurdles in achieving the desired impact:
1. It created a divide between Category-I AIFs and other funds, which led to an unintentional preference towards certain categories of AIFs.
2. Since, the notification provided a prospective relief, the tax assessments which had already begun could not be sheltered by the said exemption.
In a bid to further ease the Angel tax regulations, the Budget 2019 seeks to provide some relief on the above aspects to the start-ups. The exemption from obtaining the valuation for the purposes of section 56(2)(viib) of the Act is proposed to be extended to Category-II AIFs, thus bringing them in parity with the Category-I funds in relation to Angel tax.
The FM also announced that the eligible start-ups shall not be subjected to any tax scrutiny in relation to valuation subject to submission of prescribed declarations and information. Further, the assessing officers shall not initiate any further inquiry or verification of the valuation in pending assessments without the permission of their supervisors. The relevant amendments in the Act / notifications are expected to be released in due course.
Further, to prevent abuse of the beneficial provisions, it has also been clarified that where a start-up availing the exemption under section 56(2)(viib) subsequently fails to comply with the eligibility criteria prescribed for a start-up, it shall be charged to tax under these provisions in the year of such contravention.
Among the other tax reliefs announced for the start-up community, the eligible start-ups shall be allowed carry forward and set off of tax losses if either, 51% shareholding stays intact with the existing shareholders or all the existing shareholders continue to hold their original shares even if it is less than 51% shareholding. This will provide greater flexibility to the start-ups to restructure their capital unlike the current situation where all the shareholders (holding shares in the year of loss) are required to hold such shares in the year in which such loss is sought to be set off.
In addition to the above, the period of exemption for capital gains arising from sale of house, upon investment of gains in the start-ups has also been extended to March 31, 2021.
(Vikas Vasal is national leader-tax, Grant Thornton India and the article has inputs from Surabhi Singhal, associate director, transaction tax, Grant Thornton India)