Two weeks after the discussions with the startup and venture capital community to ease angel tax norms and revise definition of startup, the government today announced raising angel tax exemption limit for startups with share premium not exceeding Rs 25 crore from earlier Rs 10 crore.
“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,” Prabhu said in a tweet today.
“This notification is a great step forward for the startup ecosystem taken by the PMO, CBDT and DPIIT. This acknowledges India is not only going to be the world’s fastest growing startup ecosystem but it will also attract more capital,” Indian Angel Network co-founder Padmaja Ruparel told FE Online.
Angel tax is referred to 56(2)(viib) of Income Tax Act, 1961 wherein if a closely held company issues its shares at a price more than its fair market value, the amount received in excess of the fair market value will be charged as income from other sources.
Many startups have reportedly been taxed around 30% of their angel investments, which has been argued because most startups take multiple years to break-even and hence finds 30% tax on funding affecting their early growth.
Prabhu also tweeted the exemption on investments beyond Rs 25 crore limit made by non-residents, alternate investment funds – category 1.
“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,” he said.
“This should resolve the angel tax issue which has been more of a draconian tax for startups and allow even listed companies with revenues of Rs 100 core to invest in startups.,” Ruparel said.
The definition of startup has also been revised from existing 7 years since its incorporation or registration date to 10 years, Prabhu said.
Moreover, the government has also exceeded the turnover limit for entities from existing Rs 25 crore to be considered as a startup.
An entity shall be considered a startup if its turnover for any of the financial years since its incorporation/registration hasn’t exceeded Rs 100 Crore instead of existing Rs 25 crore, Prabhu said.
He also announced that a Gazette Notification will be issued for the same to get exemptions on investments under section 56(2)(viib) of Income Tax Act, 1961.
A survey by PE, VC body IVCA and community social media platform LocalCircles last week had highlighted that 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.