Employees work at a startup office in New Delhi (Photographer: Sara Hylton/Bloomberg)

Startups Cheer As Government Eases Angel Tax Norms, Widens Definition

India eased angel tax norms in a big relief for startups that feared tax demands on investments could deter early-stage investors from making bets on new ventures.

Registered startups will be exempt from tax on funding of up to Rs 25 crore compared with the existing limit of Rs 10 crore, Suresh Prabhu, minister of commerce and industry and civil aviation, tweeted on Tuesday. A company will be considered a startup for 10 years from the date of incorporation instead of seven, and the maximum turnover to be called a startup has been raised from Rs 25 crore to Rs 100 crore.

The best thing about this is that there is something for everyone, Nakul Saxena, director, public policy at think tank iSPIRT, said. Apart from increasing the cap on tax-exempted investments, he said, “There’s a clear move towards sharpening the definition of what constitutes a startup while simultaneously broadening the scope of that definition.”

Easier rules follow concerns over tax notices to more than 150 startups on their angel funding. Founders said that it could dry early-stage funding that is necessary to build a startup ecosystem and lead to exodus of new ventures from India.

“It [the relief] is very much in line of what we had asked for,” said Sreejith Moolayil, co-founder of health food startup True Elements which received a Rs 40-lakh tax notice. The government has communicated that the order will also be applicable to the startups that received notices, he said, adding he is waiting for the full notification.

The government has done a fabulous job with these changes, Mukesh Butani, founder of BMR Legal, said over the phone. “We still need to see the CBDT notification to know how all of this gets captured.”

A gazette notification regarding simplifying the process under section 56(2)(viib) of Income Tax Act, 1961 will be issued today, Prabhu had tweeted.

Also read: Repeal The Angel Tax, Recent Changes Aren’t Enough

Investments into eligible startups by non-residents, alternate investment funds (category I), and listed companies with a net worth of Rs 100 crore or turnover of at least Rs 250 crore will also be exempt under the Rs 25-crore cap, according to a separate statement issued by the government.

A startup, the statement said, will be eligible for exemption only if it’s a privately held company recognised by the Department for Promotion of Industry and Internal Trade and is not investing in any of the following assets:

  • building or land appurtenant other than that used by the startups for the purposes of renting or held by it as stock-in-trade, in the ordinary course of business.
  • land or building, or both, not being a residential house;
  • loans and advances, other than loans or advances extended in the ordinary course of business by the startups where the lending of money is substantial part of its business;
  • capital contribution made to any other entity;
  • shares and securities;
  • a motor vehicle, aircraft, yacht or any other mode of transport, the actual cost of which exceeds Rs 10 lakh, other than that held by the startups for the purpose of plying, hiring, leasing or as stock-in-trade, in the ordinary course of business;
  • jewellery other than that held by the startups as stock-in-trade in the ordinary course of business;
  • any other asset.

Startups will have to file a duly signed declaration with the department for availing the exemptions.

The policy clarification will greatly help India’s startup ecosystem, said Abey Zachariah, chief executive officer at Goodbox, a fundraising platform. “Very progressive thinking by DPIIT and active interest by Mr. Suresh Prabhu. The notification will help both past and future cases where startups have raised angel investment.”

Also read: Can The Tax Department Seize Your Bank Account And Withdraw Money?

But Vikas Srivastava, partner at L&L Partners, doesn’t expect the changes to boost India’s startup ecosystem. The proposed changes will bring in some relief in the overall scope for recognition of a startup but they fails to address the inherent issue of encouraging new startups to register in India and not overseas, he said.

The investment limit of Rs 25 crore (about $3 million) is insignificant in the current market where the value of an idea could be enormous and is not backed by equivalent amount of assets or cash flow, he said. That may leave a significant part of the Indian investment community, such as high net worth individuals, outside of the current exemption. “The proposed limit may not entirely address the concern of scalability in a competitive market like India.”

Prabhu, addressing a press conference later in the day, promised more, saying that public policy has to support startups as they will be the biggest job creators in future.

The government is planning stakeholder consultation on March 1 to seek inputs to augment the flow of funds to startups, Department for Promotion of Industry and Internal Trade Secretary Ramesh Abhishek told reporters. The government will look into other laws and regulations that create problems for flow of funds into startups, he said. “We are going to see how angel investments should be incentivised in the country.”