Government eases angel tax norms; redefines startups

In what would be a relief to startups, the government on Tuesday announced a series of exemptions for startups including in the contentious Angel Tax. In a series of tweets, Suresh Prabhu, minister of commerce & industry, said the definition of startups will be revised on the basis of their incorporation dates and turnover. The minister also said the investment limit for availing income tax concessions by startups will be raised to ₹25 crore from the current up to ₹10 crore.

An entity will be considered a startup up to 10 years from its date of incorporation/registration instead of the existing period of 7 years, he tweeted.

“An entity shall be considered a Startup if its turnover for any of the financial years since its incorporation/registration hasn't exceeded ₹100 crore instead of existing ₹25 crore,” said Prabhu.

He added that an exemption of up to ₹25 crore will be allowed on issued shares (or proposed shares) to be issued by all investors.

"Considerations of shares received by eligible Startups for shares issued or proposed to be issued by all investors shall be exempt up to an aggregate limit of ₹25 crore," he tweeted.

Industry insiders believe this will boost the morale of startups and angel investors.

“(It’s a) very welcome move addressing the draconian Angel Tax problems from 2012. Most noteworthy, other than the changes in the numbers, is the way various government bodies went about consulting & listening to the startup ecosystem players. The complete removal of valuation and share premium justification addresses the core issue that was creating the problem,” said K Ganesh, entrepreneur and partner - GrowthStory. He says as each startup has to register with the department (Department for Promotion of Industry and Internal Trade) and get approval to enjoy the exemptions, it will be some time before they start reaping the benefits.

A gazette notification will be issued today simplifying the process for startups to get exemptions on investments under section 56(2)(viib) of the Income Tax Act, 1961. So far, under Section 56(2)(viib) of the IT act, capital from angel investors is to be taxed at 30% in case they are above their fair market value.

“Extension of blanket exemption to DIPP  (Department of Industrial Policy and Promotion) registered startups who have raised up to ₹25 crores and furnish requisite documents will definitely provide relief to thousands of startups. All in all, we think that this is an extremely positive step and all that now remains to be seen is its successful implementation,” says Sharad Sharma, co-founder, iSPIRT.

“It has removed the barrier to investments by listed companies. This will encourage easier flow of Rupee capital and knowledge & infrastructure sharing between established Indian companies and startups,” says Nakul Saxena, director - public policy, iSPIRT.