According to Thursday’s notification, the investor, who proposes to subscribe to shares issued by a start-up, must have an average returned income of Rs 25 lakh or more for the preceding three financial years or the net worth of Rs 2 crore and above as on the last date of the preceding fiscal.
The government on Thursday granted relief to eligible start-ups from the so-called angel tax if they have received funds up to a certain limit, seeking to address a major concern of budding entrepreneurs. In a gazette notification, the Department of Industrial Policy and Promotion (DIPP) said start-ups can apply to an eight-member inter-ministerial board (IMB) for tax relief if “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”. As many as 18 start-ups have received notices for the “angel tax” under Section 56(2)(viib ) of the Income Tax Act, 1961. This section seeks to tax any capital raised by a closely-held company which is above its fair market value as income from other sources.
According to Thursday’s notification, the investor, who proposes to subscribe to shares issued by a start-up, must have an average returned income of Rs 25 lakh or more for the preceding three financial years or the net worth of Rs 2 crore and above as on the last date of the preceding fiscal. Also, the start-up has to obtain a report from a merchant banker specifying the fair market value of shares in accordance with relevant income tax rules. The IMB, to be headed by an additional secretary at the DIPP, will have members from the ministries of finance, corporate affairs, science and technology, electronics and IT, bio-technology, RBI and Sebi.
Last week, a government official said angel funding for start-ups had mostly been in the range of just Rs 3-4 crore. The idea behind this relief for start-ups is that an investor who is already investing in a risky venture shouldn’t be taxed. This tax was introduced in 2012 to check conversion of black money into white through high premiums on shares. The latest notification says any entity that focuses on innovation, among others, will remain a start-up for seven years from the date of incorporation unless its annual turnover breaches Rs 25 crore. For the biotech sector, an entity will be eligible to be called a start-up until 10 years unless it exceeds Rs 25-crore turnover in any of these years. “With the introduction of amendments through this notification, start-ups are likely to have an easy access to funding, which in turn, will ensure ease in starting of new businesses, promoting start-up ecosystem, encouraging entrepreneurship, leading to more job creation,” the DIPP said in a statement.
Start-ups also enjoy income tax benefit for three out of seven consecutive assessment years. A start-up set up as a private limited company or limited liability partnership incorporated between April 2016 and April 2021 will have to apply to the IMB to get such exemptions. Pranay Bhatia, partner (tax and regulatory services) at BDO India, said the notification provides clarity regarding angel tax and the limit seems reasonable. “Having said so, it increases the compliance burden on start-ups, as they will have to file forms for claiming profit-linked tax benefits and angel exemption in addition to registration with DIPP. Further, as the approval from inter-ministerial board would specify details of proposed investors, every funding from a new investor would require fresh approvals from the board.”