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news details
Govt relaxes norms for startups, raises investment limit for availing angel tax concession
2/19/2019 11:17:25 PM


New Delhi, Feb 19: In a major boost to budding entrepreneurs, the government Tuesday raised the investment limit for angel tax exemption to Rs 25 crore and extended the period of availing benefits to 10 years for startups.
Earlier, the investment limit for a startup to seek exemption under section 56(2)(viib) of Income Tax Act, 1961 was Rs 10 crore and they were permitted to avail the benefits for seven years.
According to the notification issued by the Department for Promotion of Industry and Internal Trade (DPIIT), an entity would be considered as a startup up to a turnover of Rs 100 crore as against the earlier limit of Rs 25 crore.
"Today we have issued notification which will bring in lot of welcome changes. It is a great movement forward. Startups are innovators and job creators and we would like to support it fully. Taxation issues cropped up. We took up the issues with line ministries," Commerce and Industry Minister Suresh Prabhu told reporters here.
In order to avail the exemption, a startup will be required to submit a self-declaration about the use of the raised amount to the DPIIT, which will be forwarded to the Central Board of Direct Taxes (CBDT).
"Startup shall file a duly signed declaration to DPIIT for availing exemption because it will ensure that legitimate entities gets this," he said.
With regard to the tax demands raised by the CBDT, the board said that the field formations have been advised to expeditiously clear the cases.
The development assumes significance as several startups have claimed receiving angel tax notices, impacting their businesses. Notices sent to startups under section 56(2)(viib) of the Income Tax Act demanded taxes on angel funds received by them.
S Vasudevan, Partner, Lakshmikumaran & Sridharan Attorneys, said that "the stated exemptions may provide much needed relief to the relatively larger sized start-ups, having turnover up to Rs 100 crore, who may have been required to pay tax on premiums received on share subscription".
It was also clarified that investments made by friends, or family members or promoters will be exempted up to Rs 25 crore.
The minister said that the Rs 25 crore limit will not include "the amount that is coming from alternate investment funds or eligible listed companies. So even if you are Rs 25 crore plus, you continue to enjoy the benefit".
He added that startups are eligible for exemption under Section 56(2)(viib) if it is a private limited company recognised by DPIIT and not investing in certain assets.
Those assets include investments in real estate; loans and advances; capital contribution made to any other entity; buying shares and securities; a motor vehicle, aircraft, yacht or any other mode of transport exceeding Rs 10 lakh; and jewellary.
However, the exclusions would not cover those startups who are in that particular sector and holding the specified products as stock in trade.
Elaborating on the exemptions, DPIIT Secretary Ramesh Abhishek said that angel investors who were investing less than Rs 5 crore were getting taxed and "by exempting investments up to Rs 25 crore, any investments from any investor, we have gone far beyond the angel investment issue".
The relaxation will help large number of startups, he said adding earlier mainly bio-tech startups used to avail the benefit.
"We have also added that all investments made by listed companies, whose networth is Rs 100 crore or turnover is Rs 250 crore and whose shares are frequently traded as per SEBI regulations, they can make investments into eligible startups, without any limit," he said.
So far there are over 16,000 recognised startups. To get recognition, a startup have to upload certificate of incorporation and fill up certain details.
"For new startup, we will make a provision in the registration process itself," he said, adding startup register under these provisions or any of the previous notifications, everyone is covered under this.
The notification further said that to seek an income tax exemption under section 80-IAC of the Income Tax Act, an inter-ministerial board would take the final call. So far 94 startups have obtained this exemption.
The notification which come into effect from Tuesday will be reviewed on or before March 31, 2021.
Also, investments into eligible startups by non-residents, alternate investment funds - category I - shall also be exempt under this section beyond the limit of Rs 25 crores.
Further, there is no requirement of making any application for exemption under this section and there will be no case-to-case examination of startups.
The valuation of shares is also no more a criterion for exemption of investments into eligible startups under Section 56 of Income Tax Act.
Section 56(2)(viib) of the Income Tax Act provides that the amount raised by a startup in excess of its fair market value would be deemed as income from other sources and would be taxed at 30 per cent.
Touted as an anti-abuse measure, this section was introduced in 2012. It is dubbed as angel tax due to its impact on investments made by angel investors in startup ventures.
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