Section 56 (2) (viib) of the Income Tax Act, 1961, has provisions also called as ‘Angel Tax’. You may refer our detailed report on ‘Angel Tax’ – https://taxmantra.com/tm-ebook/angel-tax-report-by-taxmantra/ – if you need more clarity on the issue involved.
The department of Industrial Policy and Promotion (DIPP), Government of India, has vide notification no. 236, dated 11thApril, 2018, has brought more clarity on ‘Angel Tax’.
As per the new notification, the startups recognized by the DIPP as a ‘Start-up’, shall apply for approval and get exempt from the dreaded ‘Angel Tax’, if the start-up is fulfilling the following conditions:
1.The Aggregate amount of Paid up share capital and securities premium of the Company, post the issue of the concerned shares, shall not exceed Rs. 10 Cr and
2.The investor or the proposed investor, has an average return income of Rs. 25 lakhs or more in preceding 3 financial years or has a net worth of rupees 2 crore or more, as on the last date of preceding financial year.
3.The Company obtains a certificate from a CA or a merchant banker, as per rule 11UA of the Income tax rules.
The approval for this purpose has to be taken as per the prescribed Form -2. DIPP Board, post the application shall call for certain details and documents relating to issue of shares and grant the approval or decline the same, stating the reasons for such rejection. Post the approval, the startup Company would exempt itself from the implications of the ‘Angel Tax’.
This is definitely a great relief to start-ups attracting investments up to Rs. 10 Cr. However, its still to be seen, how the tax departments treats the Companies who have already raised the money in past few years and have not taken the approval in Form-2.
The aforesaid notification, as covers some other points. For instance, for startups in Biotechnology sector, the time period for qualifying as a start-up has been increased to 10 years from the date of incorporation (Its 7 years for startups in other sector)
Also, for claiming 100% Corporate Income tax benefits for 3 out of first 7/10 years, application in Form I with the DIPP Board has been prescribed.
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