Govt exempts start-ups from `angel tax' for past 7 years

The government has decided to exempt start-ups from ‘angel tax’ on funds they have raised from investors for the past seven years, in a bid to stop migration of companies to other destinations and to boost investment in new startups.

The commerce and industry ministry on Tuesday issued a notification to simplify the process for startups to receive tax exemptions under an anti-evasion provision of the Act.
This provision, Section 56(2)(vii)(b), deals with taxation of share premiums received in excess of the fair market value. The Central Board of Direct Taxes will notify the changes separately.
The Central Board of Direct Taxes will notify the changes separately.
The government move comes after industry organisation made representations to the prime minister regarding the taxation of angel investments in the startup ecosystem. Trade bodies had written to the prime minister in January pointing out that many startups had received tax notices in the previous months to pay a penalty on top of a 30 per cent tax on funds they raised in the last up to seven years.
“Definition of startups has been widened,” commerce and industry minister Suresh Prabhu tweeted on Tuesday. The changes will be applicable to over 16,000 startups already registered and recognised by the government as well, according to Ramesh Abhishek, Secretary, Department for Promotion of Industry and Internal Trade (DPIIT).
According to the notification, eligible startups will receive tax exemptions on funds raised up to Rs25 crore for shares issued or proposed to be issued to angel investors. Besides this, any money received for shares issued to a listed company with a net-worth of Rs100 crore or turnover of at least Rs250 crore will also be exempted, said Abhishek.
“The Rs25-crore limit will take care of all investments of promoters, relatives, friends, angel investors and beyond,” he said.
Expanding the definition of startups will also help these firms plough back money into their venture, expand and grow, and, hopefully, create more jobs.
Investments into eligible startups by non-residents and venture capital company or fund will also be exempted beyond the Rs25 crore limit under this section of the Act, according to the notification. An entity will be recognised as a startup for up to 10 years from the date of its incorporation or registration instead of the existing duration of seven years.
However, it will not be applicable to companies that have received demand notices from the Income Tax department, clarified CBDT member Akhilesh Ranjan. In this case, entities are expected to follow the recognised process of filing an appeal, and tax officers have been given instructions not to initiate recovery of the assessed demand, he said. They have also been instructed to resolve the appeals at the earliest, he added.