In a major relief to thousands of start-ups, most of which have been slapped with tax notices, the government on Tuesday raised the cap of funding by unlisted firms or individuals in a start-up that would be exempted from the so-called angel tax to `25 crore from the current Rs 10 crore and also relaxed a clutch of rules to ease investment flow into such entities.
Investments by listed companies having a net worth above Rs 100 crore or annual turnover of Rs 250 crore will be exempt from any limit or tax, according to a proposal cleared by commerce and industry minister Suresh Prabhu.
Since a large proportion of the notices already issued are typically “assessment notices”, they will be covered by the new rules and quashed, Central Board of Direct Taxes member Akhilesh Ranjan said.
In about 100-odd cases where tax demand has already been raised, the taxmen will not take coercive action and the appeal process will be fast-tracked so that these can be disposed of quickly, he added.
The department for promotion of industry and internal trade (DPIIT) has also relaxed rules to recognise all those companies that are in operation for up to 10 years, instead of the current seven years, as start-ups, if they meet other eligibility criteria on innovation and turnover.
Even the annual turnover limit for the start-up tag has been raised four times to `100 crore to extend benefits meant for start-ups to a much larger number of companies.
Investments by non-residents and alternative investment funds (category-I) registered with Sebi in domestic start-ups will continue to be exempted from the angel tax and are not subject to the `25-crore cap. The fact that a registered foreign investor was allowed to invest without having to worry about angel tax, while domestic unlisted firms were subject to a `10-crore funding cap as well as angel tax notices had triggered protests.
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DPIIT secretary Ramesh Abhishek said the government’s intention behind the angel tax was never to obstruct the business or funding of genuine start-ups but was merely to ensure that they are not used to funnel black money. Abhishek added that he would hold a meeting with start-ups and other key stakeholders on March 1 to bring in necessary reforms to enhance the flow of funding into start-ups.
To be eligible for the relief, start-ups have to register with DPIIT and submit an undertaking, saying they are not investing in specified segments that are usually suspected to be used for money laundering unless these investments are made “in the ordinary course of business”. For instance, these start-ups can’t invest in realty; loans and advances; shares and securities; a motor vehicle, aircraft, yacht or any other mode of transport, the actual cost of which exceeds `10 lakh and jewellery, etc. However, if a start-up’s usual business model involves investment in jewellery (jewellery start-ups, for example), it can invest in it. As many as 16,116 start-ups are already registered with DPIIT and many more are now expected to get registered.
To ensure that eligible start-ups don’t get the angel tax notices at all, the government has asked start-ups to file a declaration with the DPIIT for the exemption, which will then be forwarded to the Central Board for Direct Taxes (CBDT). This is crucial, as 96% of start-ups that received tax notices had raised below the stipulated cap of `10 crore, according to a survey of 2,396 start-ups (that were slapped with such notices) by LocalCircles and the Indian Venture Capital Association.
The angel tax is typically an impost on the extra capital raised by an unlisted firm through the issue of shares over and above their fair market value. According to Section 56 of the I-T Act, the excess capital so raised is treated as income and taxed accordingly. While the section was aimed at curbing money laundering, it had troubled start-ups and their investors.
Siddharth Pai of iSPIRT, a think-tank for the Indian software products industry, said: “Today will go down as a red-letter day in the story of start-up India where domestic investors are no longer discriminated against in their own country, where entrepreneurs no longer have to fear their valuations being taxed and where domestic pools of capital can finally participate in one of the largest start-up ecosystems in the world.”
Sachin Taparia, founder and chairman at LocalCircles, said: “The move eliminates a major obstacle for Indian start-ups and, if implemented correctly, could give a significant boost to the start-up eco-system” as tax-paying individuals as well as companies will be able to invest in start-ups without hiccups. There was a request from the industry to include category-II alternative investment funds as well in the exclusion list, which has unfortunately not been considered favourably,” said Bhavin Shah of PwC India. According to Sharad Sharma, Co-Founder,iSPIRT, “ Extension of blanket exemption to DPIIT-registered start-ups who have raised up to `25 crore and furnish the requisite documents will definitely provide relief to thousands of units. All that now remains to be seen is the successful implementation (of the reliefs announced).”
The primary benefit will be the end of cumbersome paperwork which start-ups and their investors had to produce to get an exemption from angel tax. Additionally, it will direct more investments into start-ups by both existing and new investors. This will create a good pipeline of companies for further investment by VCs and similar institutions and augurs well for the start-up ecosystem in India. An improved supply of startups will also encourage more investments in venture funds in-turn,” said, Sushanto Mitra, founder & CEO, Lead Angels, a privately owned angel network.