A Big Day for Startups: Government Simplifies Exemptions for Angel Tax The definition of Startups has been revised and the process of exemptions under Section 56 (2) (viib) of Income Tax Act is simplified, says Suresh Prabhu

The over-stretched battle between the Indian government and start-ups finally sees the light. The Ministry of Commerce and Industry has cleared the proposal to simplify exemptions for startups under Section 56 (2) (viib) of the Income Tax Act and a Gazette notification is soon expected from the Department for Promotion of Industry and Internal Trade (DPIIT) to legalize the same.

In a series of tweets, the Union Minister Suresh Prabhu confirmed that an organization would be considered a startup until 10 years of its inception and not just 7 years. The angel tax issue was also taken up with the concerned officials during a roundtable organised earlier this month under the chairmanship of DPIIT. A string of start-ups and angel investors attended the discussion to put forth their points.

"Delighted to inform you that a Gazette Notification will be issued today simplifying the process for startups to get exemptions on investments under section 56(2)(viib) of Income Tax Act, 1961," Prabhu tweeted. He further added that the exemptions will be applicable to all the start-ups with a total investment not exceeding INR 25 crore.

A Big Relief

The turnover limit for an entity to be considered a start-up has been hiked to INR 100 crore instead of existing INR 25 crore. "An entity shall be considered a Startup if its turnover for any of the financial years since its incorporation/registration hasn't exceeded INR 100 crore instead of existing INR 25 crore," Prabhu mentioned.

He further informed that the 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 INR 25 crore whereas all investments made into eligible Startups by Non-Residents, Alternate Investment Funds- Category I registered with SEBI shall also be exempt beyond this limit.

With the relaxation of angel tax norms, the government has given a major relief to startups. Hailing the move, Anuj Golecha, the co-founder of Venture Catalysts stated, "Both increases in investment limit to INR 25 crore for availing exemption and self-declaration procedure with DPIIT will work as major game-changers for the startup fraternity."

Lauding the development, NASSCOM stated, "Removal of the need to justify a valuation of investment will remove the tax uncertainties plaguing the provision. Further, excluding investment from listed companies and other eligible investors from the computation of the INR 25 crore threshold means — most start-ups will now not have to face this problem."

Angel Tax Resolution

This move will eliminate various redundancies; stretched timelines and red-tapism that was earlier associated with the exemption filing procedure and ensure a conducive environment for budding entrepreneurs. Introduced in 2012, the angel tax law demands a 30.1 per cent tax from start-ups on investments they have raised from angels.

Vishal Gondal, the founder and CEO of GOQii believes that "startups contribute greatly to the country's economic growth and a seamless regulation to help them grow will not only boost the entire ecosystem to achieve its maximum potential but ultimately, benefit the end consumers as well." The new notification has eliminated the requirement for start-ups to seek protection from the angel tax every time they want to raise funds.

The government has considered all concerns and have come up with a policy that addresses the issue efficiently. Appreciating the speed at which the government is moving, the Managing Partner of Unicorn Ventures, Anil Joshi stated, "With new notification, the startup would now be not subject to angel tax provided they are recognized startup."

The Challenge

The stated exemptions may provide much-needed relief to the relatively larger sized start-ups who may have been required to pay tax on premiums received on share subscription. However, many of these reliefs will require amendments in the Income-tax Act, 1961 and the start-ups may have to wait till that time to avail these benefits.

"It is to be noted that no relief is proposed in respect of section 68 of the Income-tax Act, 1961. So the start-ups will continue to carry the onus to establish the genuineness of the source of the investment made by the investors failing which the sums received on share application can be taxed by the department," stated S Vasudevan, Partner, Lakshmikumaran & Sridharan Attorneys.

Section 68 of Income Tax Act explains any unexplained cash credit to a taxpayers account can be held as income to the taxpayer and is taxable. Unexplained cash credit is any money credited to a taxpayer for which the taxpayer cannot provide any explanation about the nature or source of the money.