Union Government has relaxed definition of startups and norms, investment limit for angel tax concession to startups. It is in line with government’s vision to promote culture of entrepreneurship and ease of doing business in India. It will also unshackle angel investing and bring in domestic monies for startups.
- Definition of Startup: Entity will be considered as startup if its turnover for any of financial year, since its incorporation or registration, has not exceeded Rs 100 crore. Earlier limit was Rs 25 crore.
- Moreover, entity will be considered start-up up to 10 years from its date of incorporation/registration instead of the previous period of 7 years
- Investment limit of angel investors seeking exemption under Income Tax Act, 1961 has been increased to Rs 25 crore from 10 Crore.
- Valuation of shares: It is no more criterion for exemption of investments into eligible startups under Section 56 of Income Tax Act.
- Also, investments into eligible startups by non-residents, alternate investment funds - category I - shall also be exempt under this section beyond the limit of Rs 25 crores.
- Further, an entrepreneur will also be eligible for exemption if it is private limited company recognised by DPIIT and is not investing in specified asset classes.
- New Limitations: Startups eligible for exemption under Section 56(2)(viib) will not be allowed to invest in immovable property, loans and advances, transport vehicles above Rs 10 Lakh, capital contribution to other entities and some other assets except in ordinary course of its business.
- Earlier, various startups had raised concerns on notices (angel tax notices) sent to them under section 56(2)(viib) of Income Tax Act, 1961, to pay taxes on angel funds received by them.
- Section 56(2)(viib) of IT Act provides that amount raised by startup in excess of its fair market value will be deemed as income from other sources and would be taxed at 30%.
- This section was introduced in 2012 and was touted as anti-abuse measure. It was dubbed as angel tax due to its impact on investments made by angel investors in startup ventures.