The Department for Promotion of Industry and Internal Trade (DPIIT) and the Central Board of Direct Taxes (CBDT) on Friday agreed to compile a list of startups eligible for angel tax exemption, based on their audited financial statements and income tax returns of the previous year. The notification is likely be issued in a couple of days.
The government also decided to raise the maximum time limit below which a firm would be deemed eligible for angel tax exemption to 10 years from the earlier seven, a member of the committee set up to look into the issue said, speaking on condition of anonymity.
Further, the paid-up share capital threshold below which startups would be eligible for an exemption has been set at ₹25 crore. In cases where the investment exceeds ₹25 crore, the firms would be eligible for exemption if the angel investors can prove a net worth of ₹2 crore or more in the previous financial year. For investments below ₹25 crore, no questions would be asked.
Angel tax is imposed on the excess share capital raised by an unlisted firm, over and above the fair market value of its shares.
This tax usually impacts startups and the angel investments they attract. While aimed at curbing money-laundering, the angel tax has also resulted in a large number of genuine startups receiving notices from the IT Department.
Startups would have to furnish three types of documents in order to be registered with the government: (i) audited financials for the previous year, (ii) IT returns for the previous year, and (iii) a self-certified declaration. The declaration is to certify that the firm does not have ownership or investments nor plans to deploy the angel investment in real estate holdings of any kind and assets, including premium cars of value above ₹10 lakh, gold and art, diamonds, precious metals or jewellery of any kind, listed or unlisted securities directly or indirectly via equity mutual funds, or art and coins.
The declaration has to also acknowledge that if the company possesses any of these items, then the exemption granted from Section 56(2)(viib) would be revoked with retrospective effect.
Once these documents are furnished, the DPIIT would have to validate them, and then submit the name and PAN of all these companies to the CBDT. The CBDT would then set up a mechanism where such recognised startups do not get notices under Section 56(2)(viib).
“The DPIIT and the CBDT have agreed to these and the notification will be issued shortly,” the member told The Hindu . “They also have agreed to increase the length of operation clause and have also increased the share capital clause to ₹25 crore.”
The DPIIT was earlier considering defining a startup eligible for exemption from the angel tax if the aggregate amount of paid-up share capital and share premium after the proposed issue of shares did not exceed ₹10 crore. This has now been raised to ₹25 crore.
The CBDT, however, said that it could not halt the proceedings in cases where the startups had already been sent a notice by the income tax department.
“Regarding the cases where notices have already been sent, the government officials are saying they are going to instruct the relevant authority to close the case as soon as possible, and also take into consideration the fact that the company is registered as a startup with the government,” the committee member said.
