Angel tax: Govt widens startup definition and removes the devil in angel tax for startups

At a time when the government has been trying to give an impetus to innovation and entrepreneurship through its initiatives such as Digital India, Make in India and a host of other drives, Tuesday's announcement by Union Minister of Commerce and Industry Suresh Prabhu gave a much needed breather to startups and new age businesses in the country.

The Department for Promotion of Industry and Internal Trade (DPIIT) has eased angel tax rules, a move which could help as many as 7,000 cash-starved startups, officials said.

To allow free flow of capital into the startup ecosystem, the government introduced changes in the sector on February 19, after pressure from venture capital funds and startups for the past three years. Startups that have raised capital up to Rs 25 crore can now claim tax benefits, which was earlier Rs 10 crore. The government also widened the definition of startup and introduced new waivers.
"Around 7,000 firms will get an immediate benefit. It would be many more over time. Many companies on our list have grown beyond just being startups and fall in the tax bracket," sources added.

In a move that would diminish the adverse impact of angel tax on the startup ecosystem to a large extent, the Ministry of Commerce and Industry on Tuesday widened the definition of startup thus making it smoother for investors to put in their money in these companies.

To begin with, the government has increased the age cap for startups from 7 to 10 years. It has revised the turnover limit for them from Rs 25 crore to Rs 100 crore and also relaxed the norms for startups seeking exemption under Section 56 (2) (viib).

Under the IT Act, Section 56 (2) (viib) money invested by angels in a company is treated as income from other sources.

This clarification would allow startups to focus on their core activities, said Bhavin Shah, financial services tax leader at PwC India.

“The turnover exemption will provide relief to a significant proportion of the smaller startups that were being targeted previously by the (tax) notices issued," said Rohinton Sidhwa, partner at Deloitte India. Such entities would not be questioned about the share premium they receive if they are registered with the department for promotion of industry and internal trade (DPIIT), the statement said. The share premium received should not be invested in land, residential building other than those held as stock in trade or occupied, rented or used by the business. The entity should also not invest the premium into shares and securities, jewellery or in vehicles priced above ₹10 lakh other than those used by the entity in the ordinary course of business.