In order to catalyse entrepreneurship by enabling angel investments to innovators across all sections of society and all sectors of economy, a Gazette notification in partial modification of Gazette Notification number G.S.R 364 (E) dated April 11, 2018 was issued by Ministry of Commerce and Industry, Department of Industrial Policy and Promotion. However, concerns were expressed regarding taxation of angel investments and there were issues that needed to be addressed to ensure availability of capital to Start-ups.
The Minister took up these issues with concerned officials and a roundtable was organized on 4th February, 2019 under the chairmanship of Secretary Department for Promotion of Industry and Internal Trade ("DPIIT") with Start-ups, angel investors, and other stakeholders with a view to discuss the new measures undertaken by the Department to address the Angel Tax issue and understand the mechanism to deal with it institutionally.
In light of the aforesaid meeting the Ministry of Commerce and Industry on February 19, 2019 notified several measures to simplify the process of exempting start-ups from angel tax and relaxed tax norms to give a boost to the entrepreneurial activity of the start-ups.
Set out below are the several measures, in tabular form against the April 2018 notification, notified by the Ministry of Commerce and Industry exempting start-ups from angel tax:
|PROVISIONS||AS PER NOTIFICATION ISSUED IN APRIL 2018||AS PER ANNOUNCEMENTS MADE IN FEBRUARY 2019|
|Definition of startup||
|Exemption under Sec 56(2)(viib)||
|Entities eligible for exemption under Sec 56(2)(viib)||
|Documents required||Startup* Annual
accounts (from incorporation) Merchant banker report
Investor** ITR for the last 3 years Balance sheet for latest FY
*Changed to Annual accounts (for last 3 FY) ITR (for last 3 FY) basis the January 2019 notification.
**Changed to (a) ITR for relevant FY; and (b) Net worth certificate for relevant FY basis the January 2019 notification.
|Filing of only a duly signed self-declaration with DPIIT for availing exemption. DPIIT shall transmit these declarations to CBDT.|
|Valuation of shares||Merchant banker
***Changed to Justification for valuation of shares basis the January 2019 notification.
|No valuation required, as valuation of shares are no more a criterion for exemption of investment.|
ARA LAW View
The notification of several measures to simplify the process of exempting start-ups from angel tax by Ministry of Commerce and Industry is being viewed as a breather by start-ups which was long overdue. That said the notification by the Ministry of Commerce and Industry on February 19, 2019 has raised few grey areas namely a) whether Start-ups that have received assessment orders would be eligible for the exemption; b) start-ups will continue to carry the onus to establish the genuineness of the source of the investment made by the investors under Section 68 of the Income Tax Act, 1962 failing which the sums received on share application can be taxed by the department; c) startups will still have to contend with bureaucracy to become eligible, as startups are required to file a declaration with DPIIT; and (d) the exemption under Section 80-IAC has not been addressed as definition of eligible business under Section 80-IAC of Income Tax Act, 1961 is not in line with the definition of start-up.
More so some of the new conditions imposed make matters tricky, namely the startups cannot invest in shares and securities. Since most ventures tend to temporarily park their funds in debt mutual funds, it would make them ineligible for the exemption as the term Securities is very broad. Further startups looking to get exemptions cannot make capital contributions to 'any entity'. This negates the scope for exemption for startups that have a subsidiary or another associated firm.
With the new exemption limit, we can expect more investment in start-ups, which is a positive sign for the entire start-up ecosystem. Also, broadening the definition of a start-up would ensure that a company can be under the start-up umbrella for a longer period of time and enjoy the perks of being a start-up for a longer period. This would help the start-ups grow faster and stick to the long-term plans That said clarifications on some of the issues highlighted above will benefit the Start-up ecosystem to a large extent. We'll be happy to assist you with any query or assistance in relation to the above. Please feel free to contact us!
For ready reference:
Web-link to the Original Ordinance: Press Release Detail
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