Angel tax: Govt widens startup definition, makes them easier to invest in

In a move that would diminish the adverse impact of angel tax on the startup ecosystem to a large extent, the Ministry of Commerce and Industry on Tuesday widened the definition of startup thus making it smoother for investors to put in their money in these companies.

To begin with, the government has increased the age cap for startups from 7 to 10 years. It has revised the turnover limit for them from Rs 25 crore to Rs 100 crore and also relaxed the norms for startups seeking exemption under Section 56 (2) (viib).

Under the IT Act, Section 56 (2) (viib) money invested by angels in a company is treated as income from other sources.

Many startups who raised angel investments in assessment year 2015-16 and 2016-17, received notices from the Income Tax department under this Act.

According to a survey done by LocalCircles and the Indian Private Equity & Venture Capital Association (IVCA), over 73 percent of startups that raised capital between Rs 50 lakh to Rs 2 crore in India had received angel tax notices from the Income Tax Department till January.

Under the new rules, in order to receive the recognition of a startup, the startups will have to make an online application to Department for Promotion of Industry and Internal Trade (DPIIT). The application will need to have a copy of certificate of incorporation or registration and a write-up about the nature of business highlighting how it is working towards innovation, development or improvement of products or processes or services etc.

The DPIIT after making some inquiries will then either recognise the eligible entity as startup or reject the application by providing reasons.

Moneycontrol had reported on February 11 that new guidelines on angel tax are likely to be announced this week in two tranches.

“The changes, in total, are a welcome move, for start-ups ... by ensuring that greater number of startups are able to avail of the exemptions, as well as facilitating investments by domestic investors without the apprehension of tax levy. The changes introduced will also alleviate the government’s concerns to a certain extent regarding shell companies evading taxes under this route, while allowing exemptions for startups,” said Atul Pandey, partner, Khaitan & Co.

Currently the country is estimated to have around 30,000 startups.

However just around 16,000 startups have DIPP- level 1 recognition and as of November, just 91 startups were approved by the government for availing tax benefits.

Earlier this month, the government had set-up a small working group constituting of angel investors and startup founders to look into issues faced by angel investors.

This meeting was the outcome of incessant protests by investors in the last few weeks following the government's angel tax notification on January 16.

The new norms were expected to soothe sentiments of the startup ecosystem. However, not many were convinced by the fresh guidelines

The government has also raised the tax exemption limit for startups with consideration received for share issuance not exceeding Rs 25 crore. Earlier the limit was Rs 10 crore.

As the per new notification, even the investments into startups by non-residents, alternate investment funds- Category I registered with SEBI will be exempted under Section 56(2)(viib) of Income Tax Act beyond the limit of Rs 25 crores.

The rules however bars startups from investing in a residential building or vehicle of above Rs 10 lakh.

“The notification has addressed the issue of angel tax i.e. section 56(2)viib for all startups with notices and those who could have gotten one”, said Sachin Taparia, founder of LocalCircles.

"We will also make a submission to CBDT soon and request them to drive fast track disposal for startups having cases under appeal with exemption to be considered and any possible consideration for orders under Section 68 where pan numbers of investors have been furnished to be included in CBDT’s instructions to assessing officers,” he added.