Revising the current definition of startups and addressing the raging issue of angel tax, the Minister for Commerce and Industry Suresh Prabhu said an entity shall be considered a startup upto 10 years from its date of incorporation / registration instead of the existing period of 7 years.
Prabhu took up these issues with the concerned officials and a roundtable was organised on February 4 under the chairmanship of DPIIT attended by a host of startups, angel investors and other stakeholders to discuss the new measures on the contentious angel tax issue.
The proposals aim to simplify the process of exemptions for Startups under section 56 (2) (viib) of the Income Tax act.
"An entity shall be considered a startup if its turnover for any of the financial years since its incorporation/registration hasn’t exceeded Rs 100 crore instead of the existing Rs 25 crore," the minister highlighted. He also said that the consideration 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.
Concerns have been flagged off by the industry earlier on taxation of angel investments and other issues that need urgent attention for availability of capital to startups.
The minister added that all investments into eligible Startups by Non-Residents, Alternate Investment Funds- Category I registered with SEBI shall also be exempt under Section 56(2)(viib) of Income Tax Act beyond the limit of Rs 25 crores.
Hailing this move as revolutionary in its essence, Padmaja Ruparel, Co-Founder, Indian Angel Network (IAN) & Founding Partner, IAN Fund said, “This will unshackle angel investing and bring in domestic monies for startups and help create the New India. The message that the government has given is that India will not only be the world’s startup hub but startups which can go global, by increasing the turnover from Rs. 25 crores to 100 crores. This is a seminal move for angel investing and the foundation of Startup 2.0.”
Funds from angels are subjected to over 30% tax if it is more than the fair market value (FMV). Introduced in Section 56 of the I-T Act in Budget 2012, it explicitly states that companies - from mature private enterprises to small startups – are liable to pay taxes on money invested at capital. But with most startups taking years just to break-even, treating part of the hard-won cash that came in from angels as taxable income, even before a company begins to make money seems unwarranted.
Saurabh Srivastava, Chairman, Indian Angel Network applauded the announcement saying that the stage was now set for the next wave of entrepreneurship. “I am delighted that the government has, in effect, abolished angel tax for startups. Kudos to DIPP for their leadership and to MOF/CBDT for collaborating to make this happen. Angel tax had begun to dampen the enthusiasm of angel investors and startups, who had begun migrating abroad. Today’s announcement will move India from third place to the number one startup nation in the world. This will transform India’s economy,” he said.
Conditions apply
A startup will be eligible for exemption if it is a private limited company which is recognized by DPIIT and is not investing in building or land appurtenant thereto; land or building, or both, not being a residential house; loans and advances, other than those extended in the ordinary course of business; 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 ten lakh rupees, other than that held by the startup; and jewellery other than that held by the startup as stock-in-trade in the ordinary course of business.
Startups would have to file a duly signed declaration with DPIIT for availing the exemption. The department will then forward it to the CBDT.