Department of Industrial Policy and Promotion (DIPP), under the Union Ministry for Commerce and Industry, has laid out clear specifications on the issue of taxation of angel investments made in start-ups in the recent notification, according to tax experts.
Start-ups have been complaining about tax on investments raised from angel investors. Some of them have received notice from the Income-Tax Department.
The notification issued on April 11 has specified conditions for availing tax exemption on shares issued by start-ups over the fair market value.
For availing the tax relief for issue of shares over the fair market value, the aggregate amount of paid-up share capital and share premium of the start-up after the proposed issue of shares should not exceed ₹ 10 crore.
Further, the investor/ proposed investor, who proposed to subscribe to the issue of shares, should either have an average returned income of ₹ 25 lakh or more for the preceding three financial years or net worth of ₹2 crore or more as on the last date of the preceding financial year.
The start-up had to obtain a report from a merchant banker specifying the fair market value of shares in accordance with rules, it said.
“There was lot of uncertainty and lack of clarity over the issue of taxation of angel investment. Now specific guidelines have been issued,” Pranay Bhatia, Partner/ Tax and Regulatory Services, BDO India, said.
He also said that the quantum on paid-up share capital and share premium post the issue seemed reasonable, given the fact that firm’s with turnover not exceeding ₹ 25 crore was considered as a start-up.
DIPP has also notified the form for claiming 100% tax exemption on profits for any three consecutive years out of the initial 7 years of the start-up. A limited liability partnership incorporated on or after 1st day of April 2016 but before 1st day of April 2021, can claim 100% tax exemption on profits for three out of seven years, as per the prescribed norms.
DIPP has also constituted a broad-based inter-ministerial board to look into the applications for claiming the tax exemptions.
“The norms increases the compliance burden on the start-ups as such they will have to file forms for claiming profit linked tax benefits and angel exemption in addition to registration with DIPP. Further, as the approval from Inter-Ministerial Board would specify details of proposed investors, every funding from a new investor would require fresh approvals from the Board,” Mr. Bhatia said.
According to DIPP, an entity shall cease to be a start-up on completion of seven years from the date of its incorporation/ registration or if its turnover for any previous year exceeds ₹ 25 crore. In respect of start-ups in the biotechnology sector, an entity shall cease to be a start-up on completion of ten years from the date of its incorporation/ registration or if its turnover for any previous year exceeds ₹ 25 crore.