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Following a series of appeals by aggrieved start-ups and investors, Suresh Prabhu, minister for Commerce & Industry, has cleared proposals for easing the requirements for ‘angel tax’ exemption.
Among the major changes announced in the gazette notification is a new expanded definition of start-ups, easing rules for investors and a one-time submission of documents by start-ups in order to avail of exemption from ‘angel tax’.
However, the demand from the start-up community to do away with the tax altogether had been declined by ministry officials. The reason cited was shell companies using start-ups to park black money. All start-ups registered and recognised by the Department for Promotion of Industry and Internal Trade (DPIIT) will be eligible for this exemption.
‘Angel Tax’, at the heart of the discontent and distress among start-ups, under Section 56(2) (vii)(b) of the Income Tax (I-T) Act, taxes as income any investments made by an Indian entity in an unlisted Indian company above fair market value.
Entrepreneurs and investors consider ‘angel tax’ an outrageous levy which places the power to ‘value’ start-ups in the hands of inspectors whose evaluation methods are at odds with the start-up ecosystem.
The gazette notification, which comes into effect from Tuesday, supersedes the one issued on 11 April 2018.
An entity shall now be considered a start-up if:
According to the notification, to be eligible for exemption, a start-up must satisfy the following conditions:
The exemption, however, relates only to section 56 of the Income tax Act. Start-ups had also requested for easing of provisions under section 68 which deals with cash credits which had not been granted. A recent case of start-up Travelkhana’s bank accounts being frozen and its balance of Rs 34 lakh taken out by income tax officials falls under section 68 of the IT Act.
On 4 February, about 40 start-up founders and investors had met officials from the DPIIT and the Central Board of Direct Taxes to voice their grievances.
After the meeting on 4 February, a core-group of start-up representatives had met with DPIIT and CBDT officials and submitted a list of recommendations on behalf of the start-up sector.
“CBDT and DIPP have accepted our recommendations as is for resolving Section 56(2)viib which is very heartening to see,” said Sachin Taparia, Founder of LocalCircles, who was a part of the core team that had submitted the recommendations.
A desperate plea by 68 startups in a letter to Prime Minister Narendra Modi on 16 January not only illustrated the distress caused by ‘angel tax’, but also served as an indictment of the government’s various start-up initiatives.
Hundreds of start-ups that raised angel funding in AY2015-16 and 2016-17 have received notices from the Income Tax department. The notices question the high share premium at which the shares have been allocated during the funding.
“The tax inspectors only understand the asset-based evaluation of companies, whereas what should be followed is the Discounted Cash Flow (DCF) method, which takes into account future growth prospects. This is much more accurate for asset-light technology start-ups.” Sreejith Moolayil, founder of health snack start-up, TrueElements had told The Quint.
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