Giving major relief to entrepreneurs, the Government relaxed the benefit of start-ups and allowed them to avail full angel full tax concession on investments worth upto Rs 25 crore. Earlier, a start-up was allowed to avail tax concession only if total investment, including funding from angel investors, did not exceed Rs 10 crore. “Considerations of shares received by eligible start-ups for shares issued or proposed to be issued by all investors shall be exempt up to an aggregate limit of Rs 25 crore,” Commerce and Industry Minister Suresh Prabhu said in a series of tweets.
The development assumes significance as several start-ups have claimed to receive angel tax notices, impacting their businesses. Various start-ups have raised concerns on notices sent to them under section 56(2)(viib) of Income Tax Act, 1961, to pay taxes on angel funds received by them. The minister said that a notification regarding simplifying the process for start-ups to get exemptions on investments under section 56(2)(viib) of Income Tax Act will be issued on Tuesday by the Department for Promotion of Industry and Internal Trade (DPIIT).
To provide these tax concessions, the department has relaxed the definition of start-ups. Now “an entity shall be considered as start-up 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,” he said. 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 Section 56(2)(viib), beyond the Rs 25 crore limit.
“Considerations of shares received by eligible startups for shares issued or proposed to be issued by all investors shall be exempt up to an aggregate limit of Rs 25 crore,” he added. Further, an entrepreneur will also be eligible for exemption if it is a private limited company recognised by the DPIIT, and is not investing in specified asset classes. However, for being eligible for exemption under Section 56(2)(viib), a startup should not be investing in immovable property, transport vehicles above Rs 10 Lakh, loans and advances, capital contribution to other entities and some other assets except in the ordinary course of its business.
S Vasudevan, Partner, Lakshmikumaran & Sridharan Attorneys said the stated exemptions may provide much-needed relief to the relatively larger-sized start-ups (having turnover up to Rs 100 crore instead of earlier threshold Rs.25 crore) who may have been required to pay tax on premiums received on share subscription. “However, many of these reliefs will require amendments in the Income-tax Act, 1961 and the start-ups may have to wait till that time to avail these benefits. It is to be noted that no relief is proposed in respect of section 68 of the Income-tax Act, 1961. So the start-ups will continue to carry the onus to establish the genuineness of the source of the investment made by the investors failing which the sums received on share application can be taxed by the department.”