Startup Definition Widened, More Relief for Investors
The government announced a series of changes aimed at freeing investors and entrepreneurs from the so-called angel tax that’s roiled India’s startup ecosystem. It raised the exemption threshold and kept investments by listed companies of certain minimum size, venture capital funds and non-residents in startups outside the ambit of the tax. The move is expected to bring relief to 16,000 companies that are registered as startups with the Department of Investment and Internal Trade (DPIIT). “Startups’ valuation was a contentious issue and we have clarified this,” commerce and industry minister Suresh Prabhu told reporters. “Now DPIIT and the Central Board of Direct Taxes (CBDT) are on the same platform.”
A notification issued by the government also widened the definition of startups to benefit a larger number of innovators and protect them from the tax. An entity that has been in operation for up to 10 years from its date of incorporation or registration will be considered a startup instead of the current seven years. A firm can be a startup if its turnover for any of the financial years since its incorporation hasn’t exceeded ?100 crore against the existing cap of ?25 crore.
Excluded Investors: The investment limit was raised to Rs 25 crore from Rs10 crore now for availing of tax exemption. “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,” Prabhu said. Under Section 56(2), when a closely held company issues shares at a price more than its fair market value, the difference is treated as income from other sources and taxed accordingly. This section, introduced as an anti-abuse measure by then finance minister Pranab Mukherjee in 2012, came to be dubbed the angel tax due to its impact on such investments in startups.
The Rs 25 crore limit will exclude funds from certain sources. These include non-residents, Category 1 registered alternative investment funds and frequently-traded listed companies with a net worth of Rs 100 crore or turnover of at least Rs 250 crore. The development comes in the wake of startups having been served demands for taxes on angel funds received by them. The commerce and industry ministry had told the finance ministry that the tax was a major impediment to the flow of investments into startups, which is a key element of the government’s employment-generation strategy.
TAX SCRUTINY: CBDT member Akhilesh Ranjan said that the new norms don’t address cases in which tax demands have already been raised. “In cases where demand notices have been raised, we have directed the tax officers to not enforce recovery of demand. In such cases, they have to file an appeal,” he said. However, Ranjan said if the government later finds any case of money laundering, then the exemption would be revoked and tax would be imposed but scrutiny would not be related to Section 56. “The DPIIT notification today addresses the issue of angel tax, that is Section 56(2)(vii)(b) for all startups with notices and those who could have gotten one,” said Sachin Taparia, founder of LocalCircles.
Both the increase in investment limit to Rs 25 crore and self-declaration procedure with DPIIT are game changers for the startup fraternity, said Venture Catalysts co-founder Anuj Golecha. “Earlier there were a lot of redundancies, stretched timelines, and red-tapism due to the procedures, which will now be eliminated,” he said. “This will further ensure a conducive environment and enable quick processes for budding entrepreneurs.”
CONDITIONS APPLY: An entity will also be eligible for exemption if it’s a private limited company recognised by DPIIT and is not investing in specified asset classes. However, for being eligible for exemption under Section 56(2)(vii)(b), 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. Startups only need to furnish a self-declaration that they are not involved in any of these activities beyond the ordinary course of business. “Our intention was never to tax investments. Now that end use has been locked, we are not concerned about valuation,” said DPIIT secretary Ramesh Abhishek.
To avail of these concessions, eligible startups will have to file a duly signed self-declaration with the DPIIT. The department will then transmit these declarations to CBDT. The valuation of shares is also no longer a criterion for exemption of investments in eligible startups under Section 56. There is no need to separately apply for exemption under the section and there will be no case-to-case examination of startups. The department will conduct a roundtable with stakeholders on March 1 on the next set of reforms, ways to augment investment in startups, incentivise angel investment and explore the concept of accredited investors. Abhishek said the DPIIT will develop a mechanism so that the self-declarations can be directly sent to the CBDT.
The Economic Times, 20th February 2019
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