Startups Expecting A New Definition and ‘Angel Tax’ Relief

The govt had issued an ‘angel tax’ exemption notice on 16 Jan which was met with widespread criticism by start-ups.

Startups that are recognised by the Department for Promotion of Industry and Internal Trade (DPIIT), under the Ministry of Commerce & Industry, are likely to get an exemption from angel tax upon a one-time submission of tax documents.

According to sources, the government is likely to issue a fresh notification on Monday, 11 February, with a slew of changes to the existing angel tax rules including a new definition for startups.

In consideration of the submissions made by the community, the new definition is likely to increase the time period of startups from 7 years to 10 years. Biotech companies could receive an extension of up to 15 years.  

The startup community, represented by a five-member team of entrepreneurs and investors met officials of DPIIT as well as the Central Board of Direct Taxes (CBDT) over Wednesday and Thursday and submitted a list of recommendations on tackling the angel tax issue under section 56 of the Income-tax Act, 1961.

According to sources with knowledge of the meeting, “the officials have been receptive of the demands of the startup community and have agreed in principle to a number of recommendations.”

While the DPIIT is expected to issue a notification on Monday, the CBDT, too, is expected to issue a notification regarding tax exemptions to startups under the Income-tax Act.

At present, in order to avail of an exemption, a startup served with an angel tax order must submit a list of documents to DPIIT which forwards it to the CBDT. The CBDT is required take a decision within 45 days.

What to Expect in the New Angel Tax Exemption Rules ?

DPIIT-Recognised Startups

In order to be exempted from the tax, startups with DPIIT Level 1 recognition will have to submit a self-certified declaration, audited financials and I-T returns from the previous year.

The DPIIT will validate these documents and the CBDT will then set up a procedure through which the DPIIT-recognised startups would not get notices for angel tax.

Introduced in 2012, angel tax is levied on the difference between the amount received by a company in lieu of its shares and the fair market value of the shares.

Modified Definition of Startups

• Increase in the time period from 7 years to 10 years for all startups, except Biotech Companies where the period should be 15 years.
• Increase in the turnover limit from Rs 25 crores to Rs 50 crores for all startups.

Issue of Shares at a Premium

Issue of shares at a premium by a DIPP-registered startup up to Rs 25 crore over its lifetime (this limit shall be revised upwards by Rs 2 crore per year to adjust for inflation) from any Indian resident investor/s to be excluded from the purview of section 56(2)(viib) and section 68.

As of now the rule states that the the aggregate amount of paid-up share capital and share premium of the startup after the proposed issue of share, if any, does not exceed ten crore rupees.

Accredited Investor

Initiate a system of an ‘accredited investor’ who declares a gross income of Rs 20 lakh OR net worth of at least Rs 1 crore.

As of now, to qualify for an exemption from angel tax the investor must have an annual income of Rs 50 lakh AND a net worth of Rs 2 crore. Startups had cried foul as the requirement of both these conditions would disqualify many investors who may be family or friends of the entrepreneur.

Relief for Startups Undergoing Appeals

The team that met DPIIT and CBDT, in its submission appealed that for affected startups, the net worth and income should be taken based on the current year’s filings. All startups who are undergoing the appeals process should be able to submit these documents before 7 March 2019 and undergo a time-barred clearance of their appeals by 31 March 2019.

A group of about 40 entrepreneurs and investors, affected by angel tax, had met officials of DPIIT and CBDT at a roundtable in Udyog Bhavan on 4 February. The officials had agreed to take forward the joint discussion and come up with a final solution in consultation with the core group representing the startup community. 

DPIIT had issued a notification regarding angel tax exemptions on 16 January. However, that notification was met with widespread criticism for not addressing the core concerns of startups served with angel tax orders.