There has been a lot of discussion on ‘Angel Tax’ in the startup community. The government has been very proactive in publishing guidelines and taking input – earlier DPIIT released another notification on this. The Startup India Association team is hoping the Department of Revenue, Finance Ministry will publish comprehensive guidelines soon.
Disclaimer: This article is for informational purposes only and is not intended to provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
Update 3: We feel the difference in “startup ecosystem specific” proposals in Mrs Nirmala Sitharaman’s maiden budget presentation and Mr Piyush Goyal’s interim budget presentation should lay to rest any discussion on the government’s seriousness in supporting the ecosystem.
Also, the “startup ecosystem specific” portion of the budget included clarification on the “Angel Tax” issue. Startups and investors who file requisite declarations will not be subjected to any kind of scrutiny in respect of valuation of share premium.
Update 2: Income Tax Dept exempts 702 startups from ‘Angel Tax’.
Update 1: Central Board of Direct Taxes (CBDT) have agreed that ‘Angel Tax’ under section 56 of the Income Tax act will not apply to startups that meet the criteria set in Feb notification from Department for Promotion of Industry and Internal Trade (DPIIT, formerly known as DIPP). However, they have said they will not intervene in ‘Angel Tax’ cases where the Assessment Order (AO) has already been passed because these are in discussion.
The Startup India Association team has been lending its voice to the many prominent entities for a revamp of ‘Angel Tax’. There is a lot of discussion on this topic in the Indian startup ecosystem. The government passed some anti-money laundering provisions in 2012. Unfortunately, these have negatively affected many members of the startup ecosystem because its not clear what a startup is or how a startup should be valued for the purposes of this tax. However, The Startup India Association team has also been reminding our membership base of the serious consideration the government has given to the matter. They have considered the many voices/suggestions and various departments have released several notifications.
The Startup India Association team has also been reminding our membership base of the serious consideration the government has given to the matter.
Early last week the DPIIT (Department for Promotion of Industry and Internal Trade, formerly known as DIPP) released some guidelines to build on the notifications issued in the past by the CBDT (Central Board of Direct Taxes) and DPIIT. This latest notification eases the definition of a startup and lays down enhanced criteria for eligibility of the Angel Tax exemption. This is yet another encouraging step by the government but does not address all issues. At Startup India Association we hope that the Department of Revenue, Finance Ministry will put all past notifications into a comprehensive set of guidelines after looking at both sections 56 and 68. We suggest our network wait for the finalized notification to be gazetted before approaching your tax professional for advise.
We suggest our network wait for the finalized notification to be gazetted before approaching your tax professional for advise.
This is the name given to the provisions on share premium and income from other sources under Section 56(2)(viib) of the Income Tax Act. It is a 30.9% tax that is levied on the funding received by startups from an external investor at a valuation that is in excess of the ‘fair market value’.
This provision was introduced in 2012 to prevent money laundering. One of the major challenges the government faces is they don’t know if the funding has been raised by a bonafide startup or a shell company so the Income Tax department doesn’t want to frame the comprehensive law. This would need the involvement of the Department of Revenue, Finance Ministry.
There is no definitive or objective way to measure the fair market value of a startup. Early stage investors might pay a premium for the idea and the business potential at the angel funding stage while tax officials normally look at the net asset value of a startup as it’s ‘fair market price’. Startups usually find it difficult to justify the higher valuation resulting in a substantially increased tax burden. Some startups have called this a ‘Startup Killer’. The importance of this issue has been highlighted when >70% of surveyed startups have received Income Tax notices recently.
Earlier this week the DPIIT updated criteria that startups must meet for exemption from Angel Tax. DPIIT has also simplified the process to apply for the exemption described in earlier notifications by CBDT and DPIIT. The notifications do exempt some angels and some startups given they meet certain criteria but a finalized ruling is needed from the government as many issues remain – startups are still getting Income Tax notices and the startups that have received a notice and the assessment order (AO) has already been passed by the Income Tax officer don’t meet these enhanced guidelines and have to go through an expensive and time consuming legal process.
According to the recent notification an entity can send self-declarations to DPIIT for exemption from Angel Tax if they meet the revised guidelines stated below.
Entity is also recognised as a startup for this exemption if it’s a private limited company and is recognized by the DPIIT as a startup and is not investing in specified asset classes.
To apply the exemption the entity just needs to submit self-declared information to the DPIIT with the relevant signatures. DPIIT will forward the declarations to CBDT. There is no need to apply for an exemption under Section 56. There is also no case-to-case examination of the startup under this section. The valuation of shares is no longer a criterion in deciding exemption under this section.
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