Angel funds refers to a money pool created by high net worth individuals or companies, generally called as angel investors, for investing in business startups. Various startups founder claimed that they received notice under section 56(2) (vii) (b) of Income Tax Act (“Act”) from Income Tax Department (“Department”) to pay taxes on angel funds raised by them. Entrepreneurs have raised their concern on such tax notices. However, India is likely to soon announce the concessions to shield startups from the angel taxes. The changes will be made to the conditions specified under section 56(2) (vii) (b) of the Act to remove any ambiguity and allow exemption for past as well as proposed investments that do not exceed INR 10 crores.
Meaning of angel tax
With an intention to promote entrepreneurship in India, government has loosened the condition for startups and investors to shield them from what has been called angel tax. Angel tax is a term referred to the income tax payable on capital raised by unlisted companies via issue of shares where the share price is seen in excess of the fair market values of the share sold. The excess realization is treated as income and taxed accordingly. This tax was introduced in the year 2012 Union Budget by the finance minister Pranab Mukherjee to seize and desist money laundering practices.
Allowances for angel investors
Suresh Prabhu, Commerce and Industry Minister of India has approved a notification concerning to this clause to make allowances for angel investors. A formal notification for such allowances will be issued by Department of Industry Policy and Promotion (DIPP). DIPP recognizes an entity as startup up to a period of 7 years from the date of incorporation, if its turnover for any of the financial year since incorporation has not exceeded INR 25 crores.
Tax exemption available
Tax exemption is the fiscal exclusion that reduces the taxable income. Under this, you can get a certain tax relief from tax, reduced tax rates or tax will be applicable on a certain portion. Tax exemptions are offered to promote certain economic activities. Startup, with a view to improve economy of any nation is considered as an economic activity which needs to be promoted and should be an eye catcher for new comers. According to the official sources, government of India has alleviated the procedure of seeking income tax exemption by startups on investments made from angel funds and prescribed a 45 days deadline for a decision on such applications.
To avail exemption according to new procedure, a startup will apply with all documents to the DIPP. Application received from the well-known or recognized startups shall be moved to Central Board of Direct Taxes (CBDT) with all necessary documents.
Earlier procedures were carried out by inter-ministerial board of certification. Now these procedures are carried out by CBDT. Within the period of 45 days from the receipt of application received from DIPP for startups tax exemption, CBDT has been mandated to approve the tax exemption for startups for the purpose of this clause or they can decline to grant such approvals.
Requisites for availing tax exemption
- A startup should be recognized by DIPP and its aggregate amount of paid up share capital as well as share premium after issuance of shares does not exceed INR 10 crores, according to a notification.
- The investor should have return income of INR 50 lakhs (earlier the return income limit was INR 25 lakhs) or more in the preceding financial year else, either its net worth or the invested amount of money should be more than INR 2 crores as on the last date of the preceding financial year.
- Startups will have to furnish account details and return of income for last three years. Likewise, investors would also have to hand their net worth details and return of income.
CBDT will soon be set for processing requests from startups and angel investors for exemption to speed up the process. DIPP will meet stakeholders to seek feedback in the first week of February 2019 to discuss all policy and implementation issues. New framework regarding the same will be announced on 16 February. Helping hand that is CBDT will set up cell to process exemptions applications. Latest notification issued by DIPP lays down a process for startups to obtain an exemption from angel tax.
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