Govt eases tax exemption process for start-ups on angel investments

The government has relaxed procedures for start-ups to seek income tax exemption on investments from angel funds as part of efforts to address investment fears of would be entrepreneurs.

The move follows complaints by founders of various startups of receiving notices under Section 56(2) (viib) of Income Tax Act from the I-T Department for tax payments on angel funds raised by them.
Commerce and industry minister Suresh Prabhu approved a notification extending allowances for angel investors and the Department of Industrial Policy and Promotion on Thursday issued a formal notification to this effect.
To claim tax exemption, a startup will have to apply, with all the documents to be recognised as a start-up, to the DIPP, which, in turn, will forward it to the Central Board of Direct Taxes with necessary documents.
“CBDT has been mandated to grant exemption approval to the start-up for the purposes of this clause or they can decline to grant such approval within a period of 45 days from the date of receipt of application from the DIPP,” according to a gazette notification.
The new procedure does away with the earlier procedure of applying to an inter-ministerial board of certification for approval. Application procedure has been simplified by making application to CBDT through DIPP.
The earlier requirement of start-up submitting a report from merchant banker specifying the fair market value of shares has also been done away with. As per the revised procedure, a start-up which is recognised by the DIPP would be eligible to seek exemptions, subject to certain conditions.
  • Start-ups will have to provide account details and return of income for last three years;
  • Similarly, investors would also have to give its net worth details and return of income. (The government had earlier allowed startups to avail full tax concession on investments up to Rs10 crore from investors, including angel financiers).
  • The conditions also include that “investor should have returned income of Rs50 lakh or more for the financial year preceding the year of investment; and net worth exceeding Rs2 crore or the amount of investment made/proposed to be made in the startup, whichever is higher, as on the last date of the financial year preceding the year of investment/proposed investment,” notification added.
Section 56(2) (viib) of the Income Tax Act provides that the amount raised in excess of a startup’s fair market value is taxed at 30 per cent as income of the firm from other sources. Prabhu had taken up the issue up with the finance ministry. Normally, about 300-400 startups get angel funding every year.
The government launched the Startup India Initiative in January 2016 to build a strong ecosystem for nurturing innovation and entrepreneurship.