Indian Government clears proposal to encourage investments in Startups
India’s Union Minister of Commerce & Industry and Civil Aviation, Suresh Prabhu has cleared a proposal aiming at simplifying the process of exemptions for startup under Section 56 (2) (viib) of Income Tax Act. The Department for Promotion of Industry and Internal Trade (DPIIT) will be issuing a gazette notification today to this effect.
In order to catalyse entrepreneurship by enabling angel investments to innovators across all sections of society and all sectors of economy, a Gazette notification in partial modification of Gazette Notification number G.S.R 364 (E) dated April 11, 2018 was issued on 16.02.19. However, concerns were expressed regarding taxation of angel investments and there were issues that needed to be addressed to ensure availability of capital to startup.
The Minister took up these issues with concerned officials and a roundtable was organised on 4th February, 2019 under the chairmanship of Secretary DPIIT with startup, angel investors, and other stakeholders with a view to discuss the new measures undertaken by the Department to address the Angel Tax issue and understand the mechanism to deal with it institutionally.
Nasscom welcomed the initiative by DPIIT to exclude startup from the ambit of Angel Tax. “The exemption not only acknowledges India to be the world’s fastest growing start up ecosystem but will also encourage more investments flow for early-stage startup in India,” read a statement from Nasscom.
The new notification has eliminated the requirement for startup to seek protection from the angel tax every time they want to raise funds. A simple exclusion of all startup raising investments up to 25 cr — does that for most startup. Removal of the need to justify 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 25 cr threshold means — most startup will now not have to face this problem.
The startup already facing problems due to the existing provisions should be able to benefit from the revised proposal. The Government’s efforts to widen the definition of stratus by increasing the turnover limit to INR 100 crore is also a welcome move.
The issue of Angel Tax has been a continuous issue for the overall growth of Indian start-up ecosystem and ease of doing business. Nasscom had earlier raised specific concerns towards the abolition of angel tax provisions to boost investments in Start-up ecosystem. The new notification is a seminal move from the government for angel investing and a step in the right direction towards the foundation of Start-up India 2.0.
With this notification, the definition of startup will be expanded. Now an entity will be considered as a Start-up upto a period of ten years from the date of incorporation and registration in place of the earlier duration of 7 years. Similarly, an entity will continue to be recognised as a Start-up, if its turnover for any of the financial years since incorporation and registration has not exceeded Rs. 100 crore in place of Rs. 25 crore earlier.
A startup will be eligible for exemption under Section 56 (2) (viib) of Income Tax Act, if it is a private limited company recognized by DPIIT and is not investing in any of the following assets:
building or land appurtenant thereto, being a residential house, other than that used by the startup for the purposes of renting or held by it as stock-in-trade, in the ordinary course of business;
land or building, or both, not being a residential house, other than that occupied by the startup for its business or used by it for purposes of renting or held by it as stock-in trade, in the ordinary course of business;
loans and advances, other than loans or advances extended in the ordinary course of business by the startup where the lending of money is substantial part of its business;
(iv) capital contribution made to any other entity;
shares and securities;
(vi) 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 for the purpose of plying, hiring, leasing or as stock-in-trade, in the ordinary course of business;
jewellary other than that held by the startup as stock-in-trade in the ordinary course of business;
any other asset, whether in the nature of capital asset or otherwise, of the nature specified in sub-clauses (iv) to (ix) of clause (d) of Explanation to clause (vii) of sub-section (2) of section 56 of the Act.
Consideration received by eligible startup for shares issued or proposed to be issued shall be exempt up to an aggregate limit of Rs. 25 crore.
In addition, consideration received by eligible startup for shares issued or proposed to be issued to a listed company having a net worth of Rs.100 crore or turnover of at least Rs. 250 crore will also be exempted.
The aggregate limit of Rs. 25 crore will exclude consideration received by eligible startup for the following classes of persons:
Non-Residents
Alternative Investment Funds- Category-I registered with SEBI
Listed company having a net worth of Rs.100 Crores or turnover of at least Rs. 250 crore provided that its shares are frequently traded as per SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
startup will file a duly signed declaration with DPIIT for availing exemption. The declaration will be transmitted by DPIIT to CBDT.
