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Angel Tax

Finally, DPIIT takes a call on Angel Tax; affected startups still in the grey

Angel Tax

Finally this morning, the sun has risen in the startup industry and Suresh Prabhu in his twitter thread announced the few changes that have been made in the functioning of startups, specifically regarding Angel Tax.

After a week-long discussion in the house of Department for Promotions of Industry and Internal Trade, the government has come up with a new definition for startups and widened the horizon of exemption in Angel Tax.

For the entire ecosystem that had been eagerly waiting for the announcement, here are the pointers that will clarify exactly what has been changed, who all are eligible for Angel Tax redemption, and how to apply for that exemption.

New definition of eligible startups by DPIIT

Time definition – Now a private limited company shall be considered a Startup for the first ten (10) years from its date of incorporation/registration. Currently, this limit is at 7 years for general startups & 10 years for biotech ventures.

Revenue definition – Now a private limited company shall be considered a Startup if its turnover for any of the financial years since its incorporation/registration hasn’t exceeded Rs 100 crore. Currently, the limit is at Rs 25 crore of revenue.

Angel tax relief

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 Rs 25 crore.

This more or less covers all angel investments/investors in India which are typically in tune of 20 lacs to 10/15 cr before institutional investors/groups come in. It specifically covers F&F (Friends & Family) investments where people invest their money (& trust) in their own punching above their weight from their income/net worth perspective.

Other Investors categories that shall also be exempt under Section 56(2)(viib) of Income Tax Act beyond this limit of Rs 25 crore are:

  • Investments into eligible Startups by listed companies with a net worth of Rs 100 crores or turnover of Rs 250 Crore.
  • Investments into eligible Startups by Non-Residents & Alternate Investment Funds- Category I

Process for DPIIT exemption

  •  Eligible Startups only have to file a duly signed self-declaration by with DPIIT for availing exemption. DPIIT shall transmit these declarations to CBDT.
  • There is no requirement of making any application for exemption under Section 56(2)(viib) of Income Tax Act.
  • There will be no case-to-case examination of Startups for exemption under Section 56(2)(viib) of Income Tax Act.

For being eligible for exemption under Section 56(2)(viib), a Startup should not be investing in the following asset classes, except in the ordinary course of its business.

  • Immovable property
  • Transport vehicles above Rs 10 Lakh
  • Loans and advances
  • Capital contribution to other entities and some others.

Big takeaways

Its a Blanket exemption without ANY IF AND BUTS.

The primary bone of contention for Angel tax – “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.

With all these :takeaways, there are a few issues that remain ambiguous and require further clarification and a few topics that require to be addressed.

What’s pending or unclear

The wording hints at the notification being applicable to all startups as long as they are DIPP recognized. However, whether the startups that are facing demand notices or are in the scrutiny process are covered or not, has to be put in black & white to avoid any further hassles.

Hopefully, a CBDT notification on top of this instructing the AO’s & CITs to consider this new exemption and dispose of all ongoing cases by Mar 31 2019 in favour of startups is in the offing.

Another area that remains unclear is whether a startup buying out other startup would disqualify the former from its exemption. It still needs to be specified if startups are allowed to invest/buy/take a stake in other competing/complimenting startups/companies or would that be not considered as a normal course of business.

No relief given to companies facing demand notices under Section 68 (unexplained cash credits), which has been imposed in some of the cases.

A future notification should cover cases where the PAN/KYC of investors is provided and the money has come through the banking channels or explained cash credits, and start ups should not bear the burden of proving the source of funding.

Update:  DPIIT has issued an official notification in the afternoon and it does not cover the startups that have already been issued demand notices for Angel Tax.

Neither is there any information about how will it impact the startups that have only received an assessment notice.

Henceforth, the grey area around whether the affected startups will experience any relief or not, remains ambiguous. 

Complete notification can be accessed here.

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