Partial Relief For Start-Ups As Centre Eases Angel Tax Exemption Rules

On the third anniversary of the government's flagship Startup India campaign, the government has notified changes to Section 56 of the Income Tax Act, in a move that brings relief to start-up founders and investors dealing with the issue of "Angel Tax". In a notification, the government on Wednesday said that all DIPP-recognised start-ups can apply to the department for approvals requesting exemption from Angel Tax, or Section 56 2 (viib) of the Income Tax Act, which will then be sent to the Central Board of Direct Taxes (CBDT) for approval. But the changes do not ensure that start-ups will no longer receive notices on angel tax from the tax department.

Angel Tax is imposed on the difference between the premium value and fair market value of shares.

The changes are applicable to start-ups, recognised by the Department of Industrial Policy and Promotion, where the amount of paid-up share capital, and share premium of the capital after the proposed issue of share does not exceed Rs 10 crore.

The notification specifies a list of documents that start-ups will have to submit to the DIPP while seeking approval. The CBDT is mandated to either approve or reject the applications within 45 days.

The development comes on the back of multiple start-up communities and investors writing to the finance minister and the commerce minister, and today to the Prime Minister's Office, seeking that the law that taxes angel investment is struck down.

The start-up community views this as a step in the right direction, but insists that the issues facing founders and investors due to angel tax remain unaddressed through the notification.

"This is a half-step by the government, not even one full step. Countries like UK, US and Singapore incentivise start-ups, here in India when the government itself is trying to boost the domestic start-up community, there needs to be tax certainty. There is no way to achieve that other than scrapping the angel tax law completely", said Ashish Agarwal, senior director - public policy at NASSCOM.

"The high eligibility criteria set for investors in a start-up is also exclusionary, and will create an elite community of angel investors, effectively shunting out the first stream of funding in a start-up, which is friends, family, batchmates, retired individuals etc. They may not always have Rs 50 lakh annual income", added Abey Zachariah, founder, Goodbox. 

The demand from start-ups still remains intact.

"Exempt all 16000+ DIPP level 1 recognised start-ups from section 56 2 (viib). Create a process through which all startups can submit 2-3 additional documents (financials, payroll, customer contracts etc) that helps DIPP and CBDT understand that these are genuine start-ups and not shell companies", maintains Sachin Taparia, founder, LocalCircles, who has engaged extensively with the DIPP and CBDT as a representative of the start-up community on angel tax.

"This is old wine in a new bottle, inter-ministerial board version 2.0. It doesn't solve any of our problems, just adds another department", said Sreejith Moolayil, founder of Bengaluru-based start-up True Elements, and a recipient of an order on angel tax.

The notification has also raised the revenue cap of eligible start-ups from Rs 25 lakh annual revenue to Rs 50 lakh. Additionally, the income tax return requirement for an investor in the start-up is raised from Rs 25 lakh to Rs 50 lakh, in the fiscal year pressing the year of the investment or proposed investment. The investor should also have a net worth higher than Rs 2 crore or exceeding the amount of the investment/proposed investment, according to the notification.