Angel Investment means investment in equity shares of startup companies by investors. Such investors who invest in the equity shares of startup companies are called Angel Investors. Angel investors are essentially the well-heeled individuals/firms/companies who used to form a group of investors for investment in startup companies or small entrepreneurs.
PROVISION OF ANGEL TAX
The provision of Angel Investment Tax was introduced in the Union Budget of 2012. Under existing rules, funds raised by an unlisted company through equity issuance are covered under this tax to the extent the amount raised is in excess of the fair market value. Such extra inflow was taxable as "income from other sources" under Section 56(2) of the Income-Tax Act, 1961 (IT Act) and charged the corporate tax rate, resulting in an effective tax of over 30%.
Section 56 of the IT Act, 1961 confers on tax authorities the power to levy excess consideration, more than the fair value, against issue of shares. Section 56 (2) (viib) of the Income Tax Act states:
"Any consideration received by a company (startup) from a resident, against issue of shares, exceeds the fair market value of such shares; such excess consideration is taxable in the hands of the startup, as an income."
Therefore, under Indian tax law, if an Indian company receives share subscription amount from an Indian resident which exceeds the fair value of shares, then the excess amount is taxed as income of such Indian company.
EXEMPTION OF ANGEL TAX
The Government of India had, now as an initiative to promote start ups, scrapped the so-called 'Angel Investment Tax' on investors providing funding to startups.
The Central Board of Direct Taxes vide Notification1 dated June 14, 2016 (CBDT Notification) had made the required changes in Section 56(2)(viib) of the Income- Tax Act, 1961 exempting startups raising funds from angel investors.
It may be noted here that for the purpose of this CBDT Notification, "startup" shall mean a company in which the public are not substantially interested and which fulfills the conditions specified in the Notification2 of the Government of India, Ministry of Commerce and Industry, Department of Industrial Policy and Promotion ("DIPP"), number G.S.R. 180(E), dated the 17th February, 2016, published in the Gazette of India, Extraordinary, part II, section 3, sub-section (i), dated the 18th February, 2016.
As per Notification of DIPP dated February 17, 2016 an entity is considered as a 'startup'-
- Up to five years from the date of its incorporation/ registration;
- If its turnover for any of the financial years has not exceeded Rupees 25 crore; and
- It is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property;
Provided that any such entity formed by splitting up or reconstruction of a business already in existence shall not be considered a 'startup'. It is to be noted that under the said Notification of DIPP, clarity has been given as to what will qualify as innovation, development, deployment or commercialization.
Accordingly, a firm/company would be considered a start-up if it is incorporated or registered in India not prior to five years, with an annual turnover not exceeding INR 25 Crore in any preceding financial year and at the same time, it should be working towards development, deployment or commercialization of new products, processes or services driven by technology or intellectual property. Further, Startups would need to get a certificate from the Inter-ministerial Board of Certification to get the status of startup.
Therefore, investment in every startup is not eligible for the exemption and only such startups which fulfill the conditions specified by the DIPP, as mentioned herein above, are eligible for exemption from Angel Investment Tax. Further, the said exemption will not apply to retrospective investments.
The exemption of Angel Investment Tax for specified startups is a step forwards in implementation of Startup India programme initiated by the Government of India. Due to high tax rate on Angel Investment in India the investors usually hesitate in making investment in such startup companies. This affects the economic growth rate of the country as well. Now the eligible startup companies need not have to pay Angel Tax even if it exceeds the fair value of shares. This will benefit the resident angel investors as well which are not registered as venture capital funds with Securities and Exchange Board of India. Although removal of Angel Tax will not benefit all the startups because of the stipulation attached in the Notification of DIPP i.e. only those start ups which have a certificate from the Inter-ministerial Board, fulfill criteria like not being more than 5 years old, turnover not exceeding INR 25 Crore, working towards innovation & commercialization of new products or services and driven by technology or intellectual property, will have the benefit and accordingly, such exemption would be welcomed by the investors as well as by the startup companies which needs such investment. This will promote the investment in India and definitely provide a huge relief to angel investors and eligible startup companies.
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