agencies
New Delhi, Feb 19: The government Tuesday revised the definition of start-ups, while also enhancing the limit of angel tax exemption.
Commerce Minister Suresh Prabhu announced on Twitter, “Definition of #Startups has been widened. An entity shall be considered a start-up up to 10 years from its date of incorporation instead of the existing 7 years.
“An entity shall be considered a start-up if its turnover for any financial year since its incorporation or registration has not exceeded Rs 100 crore instead of existing Rs 25 crore,” he added.
The Minister further tweeted, “Considerations of shares received by eligible start-ups for shares issued or proposed to be issued by all investors shall be exempt up to an aggregate limit of Rs 25 crore.” “All investments into eligible start-ups by non-residents, alternate Investment Funds- Category I registered with market regulator Sebi shall also be exempt under Section 56 (2) of the Income Tax Act beyond the limit of Rs 25 crore,” Prabhu said in another tweet.
Under Section 56 of the I-T Act, companies, including small start-ups, are liable to pay taxes on money invested as capital.
Angel investors – individuals who inject capital in a start-up in exchange for ownership stake – have been demanding scrapping of angel tax – tax levied on their investments – and the government had constituted a working group earlier this month to look into it.
Currently, startups avail tax concession only if total investment, including funding from angel investors, does not exceed Rs 10 crore.
A notification regarding simplifying the process for startups to get exemptions on investments under section 56(2)(viib) of Income Tax Act, 1961, will be issued shortly, an official said.
“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 official added.
“For being eligible for exemption under Section 56(2)(viib), a startup should not be investing in immovable property, transport vehicles above Rs 10 Lakh, loans and advances, capital contribution to other entities and some other assets except in the ordinary course of its business,” the official said.
A startup shall also be eligible for exemption under Section 56(2)(viib) if it is a private limited company recognised by the department for promotion of industry and internal trade (DPIIT) and is not investing in specified asset classes.
Eligible startups only have to file a duly signed self-declaration by with DPIIT for availing exemption. DPIIT shall transmit these declarations to Central Board of Direct Taxes (CBDT).
Further, there is no requirement of making any application for exemption under this section and there will be no case-to-case examination of startups for exemption under Section 56(2)(viib) of Income Tax Act.
“The valuation of shares is no more a criterion for exemption of investments into eligible startups under Section 56(2)(viib) of Income Tax Act, the official added.
The development assumes significance as several start-ups have claimed to receive angel tax notices, impacting their businesses.
Various startups have raised concerns on notices sent to them under the Section 56 of Income Tax Act to pay taxes on angel funds received by them.
Section 56(2)(viib) of the Income Tax Act provides that the amount raised by a startup in excess of its fair market value would be deemed as income from other sources and would be taxed at 30 per cent.
Touted as an anti-abuse measure, this section was introduced in 2012. It is dubbed as angel tax due to its impact on investments made by angel investors in startup ventures.
