Finally DIPP eases angel tax rules, but there's a catch

Department of Industrial Policy and Promotion (DIPP), under the Union Ministry for Commerce and Industry, has come out with the latest notification on angel tax exemption, which can give some relief to startups.

Now angel investors with average returned income of Rs 25 lakh for last 3 years or net-worth of Rs 2 crore are eligible for 100 per cent tax exemption on investments made into Startups above fair market value.

An angel investor is the one who funds a startup when it is taking baby steps to establish itself in the competitive market. In its current form, funds from angels are taxed at over 30 per cent if it is more than the fair market value (FMV). The clause was introduced in 2012.

Startups claiming income tax exemption under Section 80-IAC may apply separately in the prescribed application form for consideration by Inter-Ministerial Board (IMB). #StartupIndia @CimGOI @DIPPGOI @PMOIndia @rabhishek1982 @anilarch

— Startup India (@startupindia) April 12, 2018

On an average 300-400 startups get angel funding in a year. The government has extended tax benefits to just 88 startups out of 8,765 that have been recognised by DIPP since January 2016.

Also Read: Amidst govt relief assurance on angel tax, startups face questioning from tax officials

The notification further added that startups with aggregate paid-up share capital and share premium up to Rs 10 crores with merchant banker’s report of the fair market value may apply for tax exemptions under Section 56 (2) (viib) of IT Act.

DIPP has also notified the form for claiming 100 per cent tax exemption on profits for any three consecutive years out of the initial 7 years of the start-up. A limited liability partnership incorporated on or after the 1st day of April 2016 but before the 1st day of April 2021, can claim 100 per cent tax exemption on profits for three out of seven years, as per the prescribed norms.

To avail the concessions, startups would have to approach an eight-member inter-ministerial board of certification.

DIPP has issued gazette notification which reads that an entity shall cease to be a Startup on completion of seven years from the date of its incorporation/ registration or if its turnover for any previous year exceeds Rupees 25 crore.

In respect of startups in the biotechnology sector, an entity shall cease to be a Startup on completion of ten years from the date of its incorporation/ registration or if its turnover for any previous year exceeds Rs. 25 crore.

The development was reported by ET.