Clarity on angel tax lifts spirit of startups but concerns still linger

In what appears to be a salvaging act to appease the startup community, the government on January 16 issued a notification to ease the difficulties faced by angel investors.

Barely three months ahead of the Lok Sabha elections, the government realised that the angel tax issue needs to be taken care of. However, the move seems to be a tad too late.

The new norms are expected to reduce hassle of the startups as the government has now given a 45 day-deadline to Central Board of Direct Taxes (CBDT) - apex direct tax policy making body under finance ministry -- to approve or reject a startup’s request for tax exemption. This move is expected to cut red tape and ease procedures in the process of getting a clarity from the government.

Applications for exemption from angel tax will no longer we required to produce merchant bank certificate or get clearance from inter-ministerial board.

However, according to the fresh norms, only startups certified and recognised by the Department of Industrial Policy and Promotion (DIPP) will be eligible for this exemption.

According to official data, there are around 16,000 DIPP- level 1 recognised startups in the country. And as of November, just 91 startups have been approved by the government for availing tax benefits. So this rule leaves behind majority of the startups in the country.

It is a long drawn process to get a startup certificate from DIPP.

A company needs to make an online application over the mobile app or portal set up by the DIPP. The application needs to be accompanied by a copy of certificate of incorporation or registration, a write-up about the nature of business highlighting how it is working towards innovation.

The DIPP may, after calling for such documents,  recognise the eligible entity as startup, or reject the application.

"Startup which is recognised by DIPP under para 2(iii) (a) shall be eligible to apply for approval for the purposes of clause (viib) of sub-section (2) to section 56 of the Act for the shares already issued or proposed to be issued if the following conditions are fulfilled," said the notification.

Besides this, DIPP has continued to state that the aggregate amount of paid up share capital and share premium of the startup after the proposed issue of share, should not exceed ten crore rupees.

Also the investors are expected to have a returned income of Rs 50 lakh or more for the financial year. They should ensure that they take into account their net worth which should exceed Rs 2 crore or the amount of investment made/proposed to be made in the startup, whichever is higher.

"While it is a step in the right direction many issues need consideration. Why is the government making a minimum income criteria for an angel? Many professionals after retirement do angel investing and do not have Rs 50 lakh of annual income. The rules, still requires angels to upload IT returns, total assets etc. something that most angels have reservations sharing. It still requires startups to submit this exemption request for every transaction," said Sachin Taparia, founder of LocalCircles, the community media platform that hosts over 35,000 startups and SMEs.

He also added that there was no immediate solution stated for the startups who have already received orders from the government.

Angels have also criticised the limit of Rs 10 crore as aggregate share premium, stating that it does not encourage corporate, family trust investments in startups as most are not accredited investors.

However, the government's move to do away with the report from a merchant banker specifying the fair market value of shares is a relief for many.

"Now application procedure has been simplified by making application to CBDT through DIPP Portal in Form 2 online. Earlier requirement of startup to submit report from merchant banker specifying fair market value of shares has been removed. This is a positive move as it made things very cumbersome for startups," said Ishan Singh, founder of Revstart.

According to Nandini Mansinghka of Mumbai Angels, the definition of who is an angel is a welcome move too.

However, the ask from startups still remains intact. They are demanding to exempt all 16,000 DIPP level 1 recognised startups from Section 56 2 (VIIB).

"There should be a process through which all startups can submit 2-3 additional documents (financials, payroll, customer contracts etc) that helps DIPP and CBDT understand that these are genuine startups and not shell companies," said Taparia.

From trying to appease offline traders with a tighter foreign direct investment (FDI) norm for the e-commerce companies to trying to address the concerns of young startups, the government is making every last minute effort ahead of the Lok Sabha polls to ensure that it does not antagonise anyone.