angel-tax

Government to startup’s rescue – angel taxation

Concept of angel tax in India is gaining immense importance with each passing day. To keep abreast with the dynamism of market, government of India is persistently making amends in already existing provisions from time-to-time. For detailed information on tax relief provided to angel investors, visit Angel tax relief to startups.

Adding to the list of amendments, government has introduced certain changes at a roundtable organized on February 2019 under the chairmanship of Department for Promotion of Industry and Internal Trade (DPIIT). At this roundtable, Minister of Commerce and Industry, India along with few officials took up raging issues of angel tax along with revising the current definition of angel tax and suggested a gamut of alterations in this regard. The roundtable was addressed by angel investors, startups as well as other stakeholders to deliberate on new measures required to be instituted on the issues of contentious angle tax.

Following are some of the amendments introduced as a result of the roundtable:

  • Earlier upto 7 years from the date of its incorporation or registration, a company was considered to be a startup company. This period has now been extended to 10 years.
  • In addition to the above mentioned criteria, a company will be treated as a startup if at any time during preceding financial years its turnover has not exceeded INR 100 crores. Initially, this limit was INR 25 crores.
  • Consideration paid for issuing or proposing to issue securities by all investors is exempt upto
    INR 25 crores in the hands of eligible startups.
  • Investments made by the following shall also be exempt for eligible startups under section 56 of Income Tax Act (“IT Act”) beyond INR 25 crores:
  • - By non-residents,
  • - In alternate investment funds (AIF) – category I registered with SEBI
  • Funds from angel investors were subjected to over 30% tax if it exceeds the fair market value (FMV). Section 56 of IT Act explicitly mentions that entities from big private enterprises to startups are liable to pay tax on money invested as capital.

Throughout the years, most startups have tried to break-even, managing part of the hard-won funds acquired from angel investors as taxable income even prior a company makes money from it seems inordinate. Thus, for promoting startups growth in India government has excluded startups from the orbit of angel taxation which was introduced in 2012 by union government in order to avert money laundering.

A duly signed declaration with DPIIT is mandatorily required to be made by startups for taking advantage of the above mentioned. DPIIT will consequently forward the signed declaration to Central Board of Direct Taxes (CBDT). A startup will be eligible for exemption if it is a private limited company, recognized by DPIIT and fulfills all the following conditions:
 

  • No investment in building or land appurtenant thereto;
  • Land or building or both, not being a residential house;
  • Loans and advances, excluding the ones extended in the usual course of business operations;
  • Capital contributed to any other entity;
  • Motor vehicle, yacht, aircraft or any other mode of transport acquired, having an actual cost of more than INR 10 lakhs, other than those held by the startup; and
  • Possession of jewelry other than that held by the startup as stock-in-trade in the ordinary course of business.

All these amendments will redeem angel investing and usher in domestic money for startups. Resultantly, angel tax had initiated to moisten the enthusiasm of angel investors and startups, which had begun roving abroad. These announcements will revamp India’s economy.

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