Angel tax: Reprieve for startups

The government raises exemption limit, revises startup definition.

The government announced its decision to raise angel tax exemption limit for startups today whose share premium do not exceed Rs 25 crore from earlier Rs 10 crore. The decision came two weeks after the discussions it had with the startup and venture capital community on the need to ease angel tax norms and revise definition of startup.
A report in FE Online quoted a tweet by commerce minister Suresh Prabhu: “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 Rs 25 crore.” 
The report also quoted the reaction of Indian Angel Network co-founder Padmaja Ruparel, who said, “This notification is a great step forward for the startup ecosystem taken by the PMO, CBDT and DPIIT. This acknowledges India is not only going to be the world’s fastest growing startup ecosystem but it will also attract more capital.” 
Angel tax is referred to 56(2)(viib) of Income Tax Act, 1961 which lays down that if a closely held company issues its shares at a price more than its fair market value, the amount received in excess of the fair market value will be charged as income from other sources.
Reportedly, several startups have been taxed around 30% of their angel investments, which they argue, is unfair as startups generally take many years to break-even. Hence, 30% tax on funding impacts their early growth.
Another tweet from Prabhu stated the exemption on investments beyond Rs 25 crore limit made by non-residents, alternate investment funds – category 1.
“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,” he said.
It is being hoped that this would resolve the angel tax issue which has been billed as a draconian tax for startups and that it will allow even listed companies with revenues of Rs 100 core to invest in startups.
The government has also revised the definition of startups from  existing 7 years since its incorporation or registration date to 10 years.
Additionally, the turnover limit for entities from existing Rs 25 crore to be considered as a startup has also been exceeded.
Prabhu said, 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 existing Rs 25 crore.
Prabhu also said that a Gazette Notification will be issued for the same to get exemptions on investments under section 56(2)(viib) of Income Tax Act, 1961.
Source: FE Online

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