The number of Department for Promotion of Industry and Internal Trade (DPIIT)-registered startups getting exemption from the controversial Section 56(2)(viib) of the Income Tax Act, also known as Angel Tax has increased by 1282 per cent from around 135 startups getting the letter of exemption till March last year to 1,867 startups by the end of 2019. According to the FY20 annual report published by DPIIT, “intimation regarding the receipt of declaration in Form 2 has been mailed in the cases of 1,867 entities, as on December 31, 2019.” The notification to 135 startups was informed earlier by a source with direct knowledge of CBDT’s notification to startups.
Two months later in August, Finance Minister Nirmala Sitharaman had exempted DPIIT-registered startups from the 30 per cent tax levied on receiving investment against the issuance of shares “which exceeds the Fair Market Value of such shares.” Startups, in order to seek an exemption, have to declare the investment “in Form 2 to DPIIT {as per notification G.S.R. 127 (E)},” the report said. The Angel tax was introduced by the then Finance Minister Pranab Mukherjee in the FY13 budget to stop money laundering by levying it on startups that raised equity funding at a price over and above the fair valuation of the shares sold even as the premium has to be being paid by investors considered as income. The number of exemptions has gone up from around 135 till March 29 last year to 291 till April 10, 541 till May 27 and 672 till June 23.
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On the other hand, the number of startups exempted under Section 80IAC of the Income Tax Act stood at 254 startups “till date,” the report said. The recognised startups under the section are exempted from paying the income tax on the profit earned for a period of three years out of seven years since the incorporation of the company. “With a view to stimulate the development of Startups in India and provide them with a competitive platform, the profits of Eligible DPIIT Recognized Startups are exempt from income-tax for a block of 3 years out of 7 years since incorporation under Section 80IAC of the Income Tax Act,” Commerce Minister Piyush Goyal had said in the Lok Sabha in December 2019.
