The Government has widened the definition of startups to partly address angel tax woes by increasing the time period for such ventures to be treated as startups, increasing the turnover criteria and also raising the tax exemption limit for investments made.

"An entity shall be considered a startup up to 10 years from its date of incorporation instead of the existing period of 7 years," Commerce Minister Suresh Prabhu said in a tweet.

The Government has also expanded the turnover criteria. “Now a firm can be a startup even if its turnover for any of the financial years since its incorporation hasn’t exceeded Rs 100 crore instead of the existing cap of ₹ 25 crore,” according to an official release circulated by the Commerce & Industry Ministry. Currently the limit for tax exemption is ₹ 10 crore.

The minister has also stated that 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 ₹ 25 crore.

The Government had setup a working group constituting of angel investors and startup founders to look into issues faced by angel investors . This followed protests by investors that the Government’s angel tax notification on January 16 to check misuse of the tax exemption would also hurt genuine startups.

The new notification will come out today, the Minister said.

Editorial: Angel tax quagmire

 

PTI Reports

“For being eligible for exemption under Section 56(2)(viib), 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,” an official said.

A startup shall also be eligible for exemption under Section 56(2)(viib) if it is a private limited company recognised by the department for promotion of industry and internal trade (DPIIT) and is not investing in specified asset classes.

Eligible startups only have to file a duly signed self-declaration by with DPIIT for availing exemption. DPIIT shall transmit these declarations to Central Board of Direct Taxes (CBDT).

Read: T-Hub’s maiden Lab32 start-up programme raises ₹112 crore

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 for exemption under Section 56(2)(viib) of Income Tax Act.

“The valuation of shares is no more a criterion for exemption of investments into eligible startups under Section 56(2)(viib) of Income Tax Act,” the official added.

The development assumes significance as several startups have claimed to receive angel tax notices, impacting their businesses.

Various startups have raised concerns on notices sent to them under the Section 56 of Income Tax Act to pay taxes on angel funds received by them.

Also read: 65 Indian start-ups sign up for Dassault Systemes’ entrepreneurship programme

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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