Capital Gain tax reliefs for exiting startup investors

Capital Gain tax reliefs for exiting startup investors

After giving investors and entrepreneurs relief from angel tax, the government now wants to encourage startups and is examining regulatory issues, including taxation, which need to be eased.

With the commerce and industrial ministry taking steps to support budding entrepreneurs, government considers exempting investors from tax on capital gains accrued while exiting a startup so as to attract more funds in the sector. DPIIT (The Department for Promotion of Industry and Internal Trade) considers a limited exemption from capital gains tax to investors similar to tax benefits offered in the United Kingdom which helps in minimizing fraud and deploying more capital. It is considering two alternatives, a blanket exemption and a conditional exemption based on funds redeployed provide an income-tax exemption to investors looking to exit from start-ups.

Presently, a startup gets two sets of exemptions related to capital gains tax while exiting. Under Section 54 GB of the Act, investors get exemption from tax on capital gains arising from sale of a residential house or plot if the amount of net consideration is invested in equity shares of an eligible startup for purchase of a specified asset. The purchase should be made within one year from the equity investment and must be in a new plant and machinery subject to certain exceptions. This exemption is available for investments made until 31 March 2019. Section 54 EE of the Finance Act, 2016 exempt tax on capital gain arising out transfer of long term capital assets not exceeding  50 lakh in a financial year and invested in a fund notified by the central government.

DPIIT is yet to make the recommendation to the revenue department to deliver the recommended incentives to the startups. These suggestions are part of ‘Startup India Vision 2024′, prepared by the DPIIT for the new government to promote growth of budding entrepreneurs, who face difficulty in raising finances.  The ministry is taking all steps to promote and strengthen the startup ecosystem in the country. After claims being made by several startups that they are receiving tax notices under section 56 (2) (viib) of the Income Tax Act, 1961, to pay taxes on angel funds received by them, DPIIT is in consultations with CBDT(Central Board of Direct Taxes) to resolve the issue.

Several other measures including incentivizing investors are also proposed in order to boost businesses of start-ups which would further promote innovation.

Section 56(2)(viib) of the Act provides that the amount raised by a start-up in excess of its fair market value would be deemed as income from other sources and would be taxed at 30% . 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 start-up ventures.

The full-fledged budget for the financial year 2019-20 is due in July 2019 after the new government assumes office likely in late May 2019. The DPIIT is accordingly looking to propose the capital gains tax exemption after the new government is elected in India. However, there are still recommendations left for the revenue department on providing capital gains tax exemption to the revenue department. These benefits provide relief to those who liquidate personal assets to fund their startups while the next set of incentives under consideration seek to encourage all investments in startups. The document aims at facilitating setting up of 50,000 new start-ups in the country by 2024 and creating 20 lakh direct and indirect employment opportunities.

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