Employees work in front of computer monitors at a startup office. (Photographer: Dhiraj Singh/Bloomberg)

Government Eases Process For Startups To Seek Tax Exemption On Angel Funds

The government has eased the process for startups to seek income tax exemption on investments made by angel investors.

This comes after founders of startups received notices under Section 56(2) (viib) of the Income Tax Act to pay taxes on angel funding raised by them.

To avail the tax exemption:

  • A startup should be recognised by the Department of Industrial Policy and Promotion and its aggregate amount of paid up share capital and share premium after issuance of shares does not exceed Rs 10 crore, according to a notification.
  • The investor should have a returned income of Rs 50 lakh or more in the preceding financial year; or either its net worth or the invested amount should be more than Rs 2 crore as on the last date of the preceding financial year.

Also read: The 2019 Agenda For India’s Startups And Venture Capital

The DIPP recognises an entity as a startup up to a period of seven years from the date of incorporation, if its turnover for any of the financial years since incorporation has not exceeded Rs 25 crore.

To seek tax exemption, a startup will make an application to the DIPP, which will move it to the Central Board of Direct Taxes with necessary documents.

Startups will have to provide account details and income returns for the last three years, while investors will have to submit their net worth details and returns for the year investment has been made.

The CBDT has been mandated to approve or decline the exemption to the startup within 45 days of receiving the application.

Startups which have been issued tax assessment orders for the previous years by the taxman will not be eligible to apply for the exemption for that financial year, said Amit Maheshwari, partner at Ashok Maheshwary & Associates LLP.

The earlier requirement of a startup to submit report from merchant banker specifying the fair market value of shares has been done away with. The application form, however, seeks justification for valuation of shares.

Approval of inter-ministerial board of certification is no longer required, news agency PTI reported. Procedure for startups has been simplified by making application to the CBDT through DIPP, the report said.

Also read: Angel Tax: Will The Wicked Consume The Righteous?