The government has eased the norms under which start-ups can apply for exemption from the angel tax which would otherwise be applicable on them.
The angel tax applies to unlisted companies that have raised capital through an issue of shares at a price deemed to be in excess of the fair market value of those shares. The excess capital over and above the fair market value is then treated as income and taxed accordingly. As this largely affects angel investments in start-ups, it has been dubbed angel tax.
Recently, several start-ups raised the issue of notices being sent by the Income Tax Department, which then spooked the start-up community and led the government to re-examine the rules regarding exemption from the tax. The Department of Industrial Policy and Promotion (DIPP), last month, issued a statement saying that it had taken up the matter with the Department of Revenue in order to ensure that “there is no harassment of angel investors or start-ups”.
According to the notification issued by the government on Wednesday, start-ups, whose aggregate amount of paid-up share capital and share premium after the proposed issue of share does not exceed ₹10 crore, are eligible for the exemption. On the investor side, the notification says the angel investor should have filed I-T returns of at least ₹50 lakh for the year preceding the year in which the investment was made.
“The government has notified conditions under which a company can be exempted from coverage of the Angel tax provisions,” Rohinton Sidhwa, partner at Deloitte India said, “It [government] appears to exempt eligible start-ups that have been approved by DIPP. The claim for eligibility is to be approved by the CBDT and requires the start-up to be below the prescribed capital threshold of 10cr. The requirements are effective immediately. This seems to clarify the uncertainty faced by start-ups over the angel tax.”
Further, the investor’s net worth has to be at least ₹2 crore or the amount of investment made in the start-up, whichever is higher, as on the last date of the financial year preceding the year of investment.
To claim the exemption, start-ups and investors have to make an application to the DIPP, in the prescribed format, along with the necessary documents. Once approved, the Central Board of Direct Taxes (CBDT) is to then issue a certificate of exemption within 45 days of the application.
The notification, however, specifies that an application for exemption cannot be made if an assessment order has already been raised by an assessing officer for the relevant financial year.
