The Indian commerce minister informed in a series of tweets that the definition of startups has been widened and the process for them to seek exemptions on the much-feared ‘angel tax’ has been simplified. The move is intended to woo the startup community ahead of general elections.
Angel tax has been a bone of contention among entrepreneurs and angel investors since 2016. It is levied on the funding received by startups and unlisted companies from an external investor. A 30% tax is levied when startups receive angel funding at a valuation higher than its ‘fair market value’. Entrepreneurs felt this was unfair and even considered registering their companies overseas, such as Singapore and the US.
Startups will now be allowed to avail full angel tax concession on investments worth up to Rs 25 crore. Earlier they were allowed to avail this concession if the investment remained under Rs 10 crore.
“Delighted to inform you that a Gazette Notification will be issued today simplifying the process for startups to get exemptions on investments under section 56(2)(viib) of Income Tax Act, 1961,” minister Suresh Prabhu tweeted.
An entity shall now be considered a startup up to 10 years from its date of incorporation instead of the existing period of 7 years. The minister also tweeted that "an entity shall be considered a startup if its turnover for any of the financial year, since its incorporation or registration, has not exceeded Rs 100 crore instead of the existing Rs 25 crore.”
Besides, investments by listed companies with a net worth of Rs 100 crore or turnover of Rs 250 crore into an eligible startup would also be exempted from the angel tax, beyond the Rs 25 crore limit.
A recent survey by community social media platform Local Circles and the Indian Private Equity & Venture Capital Association (IVCA) revealed that more than 2,000 startups that had received funding from investors — angel financiers, private equity and venture capital funds — have received angel tax notices. According to a Tracxn report, the number of seed and angel investments has reduced by more than half, from 1030 in 2016, when the angel tax was put in place, to 484 in 2018.
The valuation of shares is also no more a criterion for exemption of investments into eligible startups under Section 56 of Income Tax Act.
Rehan Yar Khan, Partner, Orios Venture Partners, while dubbing angel tax as shaitan (devil) tax, said that the notification falls far short of what was promised. He tweeted that that new notification denies relief to thousands of startups who received notifications last year because startups will still have to make separate applications for exemption.