Amid several calls from startups for abolishing angel tax and media reports that the government may water down angel tax provisions, on January 16, 2019, the government notified the much-needed amendments, allowing startups recognised under the Startup India initiative to seek approval and claim relief.
Here are some of the key amendments in the notification:
- The requirement of ‘Merchant Banker Valuation’ has been done away with for recognised startups.
- For claiming exemption u/s 56 (2) (viib), (the underlying section of the Income Tax Act which triggers the ‘Angel Tax’), the approval from Inter-Ministerial Board is no longer required.
- Instead, the Department of Industrial Policy and Promotion (DIPP) shall send the applications seeking exemptions to the Central Board of Direct Taxes (CBDT) for its approval. This approval from CBDT shall be provided or rejected within 45 days from the receipt of application from DIPP.
- The application for approval shall be made in Form-2 to DIPP along with the specified documents therein.
- The application can be made by a recognised startup, either for shares already issued or for a proposed investment.
The conditions for the application for approval and claiming the exemption are as follows:
- The startup should be recognised by DIPP, by way of an online application under the Startup India initiative (this is a general recognition; for claiming exemption from angel tax, additional approval from CBDT as per this notification is required).
- The aggregate amount of paid-up capital and share premium of the startup after the proposed issue should not exceed Rs 10 crore.
- The investor/proposed investor should have returned income of Rs 50 lakh or more for the financial year preceding the year of investment/proposed investment, and a net worth exceeding Rs 2 crore or the amount of investment proposed, whichever is higher.
So, what do these amendments mean for startups, and what is their impact on angel tax?
Of late, the general recognition and registration of startups under the Startup India initiative has picked up pace, and a lot of startups have already got the initial recognition under the programme. However, for availing income-tax exemptions and exemption from angel tax, they earlier needed approval from Inter-Ministerial Board (IMB). This was turning out to be a bottleneck and a time-consuming process, as not many startups were able to pass the test from the IMB. Also, as the approval was not time-bound, the process of acceptance/rejection was often delayed.
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