The commerce minister Suresh Prabhu after consultation with industry members and startups heeded to their demands of easing the angel tax regulations.
2012 was among the crucial years in Indian startup ecosystem history from the regulatory perspective when former minister Pranab Mukherjee introduced section 56(2)(viib) in the Income Tax Act. The controversial tax structure (labelled as angel tax) that saw massive backlash from startups and venture capital investors was otherwise set up with the purpose to check on money laundering. However, that inadvertently led to throwing the book at almost every entity that called itself a startup.
In between multiple dialogues and discussions between the ecosystem and the government, incremental solutions were announced but start-ups continued facing tax notices from the government.
For instance, as per a survey by PE, VC body IVCA and community social media platform LocalCircles last week, over 2,100 or 73% of the startups that raised angel funding since their inception (before or after 2011) have been slapped with one or more angel tax notices from the income tax department.
“Like we said that let data do the talking, this brings more clarity to the issue of angel taxation…seemingly this survey gives a more credible data,” IVCA president Rajat Tandon said in the survey.
Cut to February 19, 2018, commerce minister Suresh Prabhu after consultation with industry members and startups heeded to their demands of easing the regulations required to ensure India remains a thriving startup land.
The minister made 5 key announcements pertaining to the angel tax and startup definition. Start-ups will have to file a declaration with DPIIT for availing the exemption. DPIIT will submit the declaration to CBDT. Below is the rundown for the same:
- The government extended the duration of startups from the time of their incorporation from 7 years to 10 years. This will bring thousands of companies set up post 2009 and before 2012 under the startup ambit.
- Apart from the number of years of incorporation, a company shall be considered a startup provided its turnover hasn’t exceeded Rs 100 crore for any of the financial years since its incorporation. The earlier limit was Rs 25 Crore.
- Government also said that the considerations of shares received by eligible startups for shares issued or proposed to be issued by all investors shall be exempt up to an aggregate limit of Rs 25 crore.
- Also consideration received by eligible Start-ups for shares issued or proposed to be issued to a listed company having a net worth of Rs 100 crore or turnover of at least Rs. 250 crore will also be exempted.
- Investments into eligible Startups by Non-Residents, Alternate Investment Funds- Category I registered with SEBI shall also be exempt under Section 56(2)(viib) of Income Tax Act beyond the limit of Rs 25 crores.
“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 AIFs as well in the exclusion list, which has unfortunately not be considered favourably,” said Bhavin Shah, Financial Services Tax Leader, PwC India.
Government, nonetheless, categorically stated conditions as well that stands to withdraw the benefits to startups if they invests in building or land appurtenant thereto, being a residential house and land or building, or both, not being a residential house; loans and advances, other than those extended in the ordinary course of business; capital contribution made to any other entity; and shares and securities.
Also, the startup must not have investments made in motor vehicle, aircraft, yacht or any other mode of transport, the actual cost of which exceeds Rs 10 lakh; jewelry other than that held by the start-ups as stock-in-trade in the ordinary course of business.
“The stated exemptions may provide much needed relief to the relatively larger sized start-ups (having turnover upto Rs 100 crore) who may have been required to pay tax on premiums received on share subscription,” S Vasudevan, Partner, Lakshmikumaran & Sridharan Attorneys said.
However, many of these reliefs will require amendments in the Income-tax Act, 1961 and the start-ups may have to wait till that time to avail these benefits, Vasudevan added.