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Relief for Angel Investors, Government clears proposal to encourage investments in Start-Ups; hikes tax exemption cap

The Section 56(2)(viib) of the Income Tax Act provides that the amount raised by a start-up in excess of its fair market value would be deemed as income from other sources like angel investors and would be taxed at 30 percent. This section was introduced in 2012 and the tax was named as the ‘Angel Tax’.

Feb 20, 2019 16:10 IST
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Union Minister of Commerce & Industry and Civil Aviation, Suresh Prabhu on February 19, 2019 cleared proposals to encourage investments in Start-Ups, aiming at simplifying the process of exemptions for Start-ups from the ‘Angel Tax’ under Section 56 (2) (viib) of Income Tax Act, 1961.

As per the new norms, registered startups will be exempted from tax on funding of up to Rs 25 crore compared with the existing limit of Rs 10 crore.

Significance

The new norms aim to catalyse entrepreneurship by enabling angel investments by innovators across all sections of society and all sectors of economy.

Till date, the startups were availing of the tax concession only on the condition that their total investment, including funding from angel investors, does not exceed Rs 10 crore.

The eased norms were the outcome of a meeting between Union Minister Suresh Prabhu with concerned officials and a roundtable was organised on February 4, 2019 under the chairmanship of Secretary DPIIT.

Section 56(2)(viib) of the Income Tax Act (Angel Tax)

The Section 56(2)(viib) of the Income Tax Act provides that the amount raised by a start-up in excess of its fair market value would be deemed as income from other sources like angel investors and would be taxed at 30 percent. This section was introduced in 2012. This tax was named as the ‘Angel Tax’.

Angel tax is applicable to unlisted companies that have raised capital through sale of shares at a value above their fair market value. This tax affects start-ups and the angel investments they attract. Entrepreneurs and investors consider levy of the ‘angel tax’ as offensive.

Definition of ‘Start-ups’ expanded

The norms expand the definition of a ‘Start-Up’. Now an entity will be considered as a Start-up up to 10 years from its date of incorporation and registration instead of the previous period of 7 years.

Similarly, an entity will continue to be recognised as a Start-up, if its turnover for any of the financial years since incorporation and registration has not exceeded Rs 100 crore instead of Rs. 25 crore limit earlier.

Cases of Exemption of Start-Ups from Angel Tax

Start-ups will be exempted from the Angel Tax in following cases:

  • Investments of up to Rs 25 crore received by eligible Start-ups for shares issued or proposed to be issued.
  • Investments made by a listed company having a net worth of at least Rs 100 crore or a turnover of at least Rs 250 crore.
  • The aggregate limit of Rs. 25 crore will exclude consideration received by eligible Start-ups for the following classes of persons:
  • Investments made by non-residents will also be exempted.

Start-ups will need to file a duly signed declaration with DPIIT for availing of the exemption. The declaration will be transmitted by DPIIT to the CBDT.

Eligibility for exemption from the Angel Tax under Section 56 (2) (viib) of Income Tax Act

A Start-up will be eligible for exemption under Section 56 (2) (viib) of Income Tax Act, if it is a private limited company recognised by Department for Promotion of Industry and Internal Trade (DPIIT) and is not investing in:

Building or land or both, unless it is for its business or used by it for purposes of renting or held by it as stock-in-trade.

Loans and advances, other than loans extended in the ordinary course of business by the Start-ups

Capital contribution made to any other entity

Shares and securities

a motor vehicle, aircraft, yacht or any other mode of transport, the actual cost of which exceeds Rs 10 lakh, other than that held by the Start-ups for the purpose of plying, hiring, leasing or as stock-in-trade

Jewelry other than that held by the Start-ups as stock-in-trade

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