Startup and Angel Tax exemption
In order to address issues faced by start-up ventures in India including angel tax woes, which led to protest by startups as well as investors in the country, the government has widened the definition of startups that includes increasing the time period for such ventures to be treated as startups, increasing the turnover criteria and also raising the tax exemption limit for investments made.
In a nutshell, below are the changes made for startups in India to feel better-
1. An entity shall be considered a startup up to 10 years from its date of incorporation instead of the existing period of 7 years.
2. A company can be called a ‘Startup’ even if its turnover for any of the financial years since its incorporation hasn’t exceeded 100 crores instead of the existing cap of 25 crores.
3. 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 25 crores.
4. For being eligible for exemption under Section 56(2)(viib), a startup should not be investing in immovable property, transport vehicles above Rs 10 Lakh, loans, and advances, capital contribution to other entities and some other assets except in the ordinary course of its business.
5. A startup shall also be eligible for exemption under Section 56(2)(viib) if it is a private limited company recognized by the Department for The Promotion of Industry and Internal Trade (DPIIT), formerly DIPP, and is not investing in specified asset classes.
6. Eligible startups only have to file a duly signed self-declaration by DPIIT for availing exemption. DPIIT, formerly DIPP, shall transmit these declarations to the Central Board of Direct Taxes (CBDT). The valuation of shares is no more a criterion for exemption of investments into eligible startups under Section 56(2)(viib) of Income Tax Act. This means that now, there would be no requirement of making an application for exemption under this section and there will be no case-to-case examination of startups for exemption under Section 56(2)(viib) of Income Tax Act.
Introduced in 2012, Section 56(2)(viib) — commonly referred as ‘Angel Tax‘ — of the Income Tax Act provides that the amount raised by a startup in excess of its fair market value would be deemed as income from other sources and would be taxed at 30 per cent.