New rules pertaining to angel tax has been notified by the Centre as per which registered start-ups of a specified size will be exempted from the tax and scrutiny related to its applicability if any.
Unlisted companies that have raised capital through sales of shares at a value above their fare market value will be liable to pay angel tax.
The excess capital earned through sale of shares is treated as income and taxed accordingly. Start-ups are affected by this tax and the angel investments which they attract also get affected in the process. The recent notification by the central government has notified that the investments of up to Rs.25 crore in an eligible company will be exempt from the angel tax.
Moreover, investments made by a listed company of a net worth of at least Rs.100 crore or a turnover of at least Rs.259 crore would also be exempt. Non-resident making any investments will also be exempted as per this rule.
An eligible start-up has been defined in this notification as one that is registered with the government and has been incorporated for less than 10 years. It should also have a turnover that has not exceeded Rs.100 crore over that period.
This is so far seen as a positive move by the government and this clarification would lend a helping hand in avoiding potentially significant tax challenges faced by the start-ups.
What has however not been considered favorably is a request from the industry to include Category II Alternate Investment Funds as well in the exclusion list. The company needs to make an online application to the Department for Promotion of Industry and Internal Trade (DPIIT) in order to register with the government.
A copy of the Certificate of Incorporation or Registration will be required to be attached with the application besides a write up about the nature of the business highlighting how it is working towards “innovation, development or improvement of products or processes or services or its scalability in terms of employment generation or wealth creation”.
The start-up community has welcomed this move. However they would take up some prevalent issues of notices being sent to start-ups and applicability of Section 68 of the I-T Act with the tax department. The recent notification has also addressed many of the concerns raised by the start-ups but with this it also imposes certain restrictions on investments by the start-ups. Some of these restrictions can lead to hardships for the start-ups and may disqualify some genuine start-ups from this exemption.
After the documents and signed declaration are submitted to the DPIIT, it will be decided by the body if the start-up is eligible or not and then the list of eligible start-ups will be communicated to the Central Board of Direct Taxes.