Government Announces Angel Tax Exemption For Recognised Start-Ups

A long-drawn dialogue between troubled start-ups and the government has finally come to a close, with the government announcing a blanket exemption from angel tax for all start-ups that are recognised by the Department for Promotion of Industry and Internal Trade or DPIIT, the government body which addresses concerns of start-ups. Suresh Prabhu, Union Minister for Commerce, said the exemption will apply to all start-ups with total investment not exceeding Rs. 25 crore.

The government has also widened the definition of a start-up, announcing that an entity shall be considered a start-up for up to 10 years from its date of incorporation/registration instead of the existing period of seven years.

Moreover, the turnover limit for an entity to be considered a start-up has been hiked by four times, to Rs. 100 crore from Rs. 25 crore.

These decisions - a long-standing demand of the start-up and angel network to the government - come on the back of several rounds of meetings and submissions made to the Department for Promotion of Industry and Internal Trade, and the Central Board of Direct Taxes (CBDT).

To be exempted from angel tax, start-ups will have to submit self-certified declaration along with audited financials and income tax returns of the previous year, Mr Prabhu said.

The documents will be validated by the DPIIT and then the CBDT will set up a mechanism through which such recognised start-ups do not get notices for angel tax, according to sources.

"Government's intent was never to tax such investment. By this notification we have gone far beyond the angel tax issue by increasing turnover and increasing life cycle. We've now included far more companies in the start-up community than before," DPIIT Secretary Ramesh Abhishek said.

However, while clarifying that the new notification will not apply to start-ups that have received orders to pay up the angel tax, and cases in appeal, CBDT member Akhilesh Ranjan said, "This (notification) will not be able to cover cases where demand has been raised, but we are working on cases in appeal, so they are disposed of within a timeline.That's how we will deal with them. Even if there is an order, recovery won't happen. Orders have been given to tax officers, and appeals will be expedited."

Many start-ups welcomed the move by the government. 

"The DPIIT notification today addresses the issue of angel tax i.e. section 56(2) viib for all start-ups with notices and those who could have gotten one," said Sachin Taparia, founder of LocalCircles.

"The government has done away with the valuation concept completely, which was the bone of contention between the AOs (assessing officers) and the start-ups, so that's a big relief... There is a no-if, no-but exemption given to start-ups upto an investment limit of Rs 25 crore, which is what start-ups were looking for", said Ashish Chaturvedi, founder, School Diary. "But the notification doesn't cover existing orders, so those who have the orders are currently not benefitted in this... Hence no retrospective effect."

Mr Chaturvedi is one of the start-up founders who received as assessment order on angel tax from the Income Tax Department. His case is currently in appeal.

"It is solved for section 56 but there are a few things which we will have to keep going back to. Section 68, source of funds, accredited investor etc. It is a continuous process, but for DIPP (DPIIT) and CBDT to make such a change in such a short span of time is unheard of," said Nakul Saxena, iSpirit.

Angel tax was introduced in 2012 and is levied on the difference between the amount received by a closely held company in lieu of its shares and the fair market value of the shares. The excess amount is taxed as income from other sources.

Under the angel tax law, the Income Tax Department has sent several notices and orders to founders, demanding a 30.1 per cent tax on investments they raised in the previous years.

"We will also make a submission to CBDT soon and request them to drive fast track disposal for start-ups having cases under appeal with exemption to be considered and any possible consideration for orders under section 68 where pan numbers of investors have been furnished to be included in CBDT's instructions to assessing officers," added Mr Taparia of LocalCircles.

The government however stated few conditions under which the start-ups will be eligible for the exemption under Section 56 (2) (viib) of the Income Tax Act. It clarified that the start-up will be eligible if it is a private limited company recognised by DPIIT, and is not investing in any of the following assets:

1. building or land appurtenant thereto, being a residential house, other than that used by the Start-ups for the purposes of renting or held by it as stock-in-trade, in the ordinary course of business;
2. land or building, or both, not being a residential house, other than that occupied by the Start-ups for its business or used by it for purposes of renting or held by it as stock-in trade, in the ordinary course of business;
3. loans and advances, other than loans or advances extended in the ordinary course of business by the Start-ups where the lending of money is substantial part of its business;
4. capital contribution made to any other entity;
5. shares and securities;
6. a motor vehicle, aircraft, yacht or any other mode of transport, the actual cost of which exceeds ten lakh rupees, other than that held by the Start-ups for the purpose of plying, hiring, leasing or as stock-in-trade, in the ordinary course of business;
7. jewellary other than that held by the Start-ups as stock-in-trade in the ordinary course of business;
8. any other asset, whether in the nature of capital asset or otherwise, of the nature specified in sub-clauses (iv) to (ix) of clause (d) of Explanation to clause (vii) of sub-section (2) of section 56 of the Act.

The DPIIT will be hosting a roundtable with the start-up community on March 1 to deliberate ways of augmenting the flow of funds to start-ups, the secretary said.