Industry on Tuesday said measures announced by the government to promote startups will encourage investments and boost morale of angel investors. The move, which is to ensure availability of funds for startups, follows concerns regarding the taxation of angel investments in this sector.
New Delhi- In a two-pronged move to improve the fledgling startup eco-system, India on Tuesday raised the limit of angel tax exemption for startups, while revising the definition of such an enterprise.
The ministry of commerce and industry on Tuesday said it has revised the definition of a startup that it would consider for taxation objective.
"An entity shall be considered a startup if its turnover for any of the financial years since its incorporation/registration hasn't exceeded Rs 100 Crore instead of existing Rs 25 crore", he said.
Union Minister for Commerce and Industry Suresh Prabhu has cleared a proposal to simplify exemptions for startups under Section 56 (2) (viib) of the Income Tax Act, according to a release from the Commerce Ministry. The entrepreneur community was anxious, as they had started receiving angel tax notices.
The government said eligible startups only have to file a duly signed self-declaration with the DPIIT to avail an exemption.
Expanding the definition of startups will also help these firms plough back money into their venture, expand and grow, and, hopefully, create more jobs. With this, start-ups can apply to the Central Board of Direct Taxes in advance and seek exemption.
A startup shall also be eligible for exemption under Section 56 (2)(viib) if it is a private limited company recognised by the department for promotion of industry and internal trade (DPIIT), formerly DIPP, and is not investing in specified asset classes.
Giving a major relief to startups, the government has made a decision to relax angel tax norms for startups, including increasing the investment limit to Rs 25 crore for availing income tax concessions by startups, an official said today.
Angel tax was introduced in 2012 and is levied on the difference between the amount received by a closely held company in lieu of its shares and the fair market value of the shares. It should also not invest in capital contribution for other entities, and other assets except in the ordinary course of its business.
Saurabh Srivastava, Chairman, Indian Angel Network says that this announcement will unleash the next wave of entrepreneurship, making India the number one start-up nation in the world.
Sachin Taparia, Founder of LocalCircles said that this would eliminate a major obstacle for startups. VCs and angel groups come under this category of investors, giving them an undue advantage over individual investors who are not part of it, said industry experts. So honestly what is happening is Section 56 impact to startups, which we have been fighting for the last six years, which was actually promulgated in the last previous government's budget, has been diluted dramatically in favour and made it a more enabling ecosystem for startups. Right now, 30.9% Angel Tax is charged from startups raising their first, Angel funds.
However, it will not be applicable to companies that have received demand notices from the Income Tax department, clarified CBDT member Akhilesh Ranjan.