Department of Industrial Policy and Promotion (DIPP), under the Union Ministry for Commerce and Industry, has finally exempted startups from ‘angel tax’ if its total investment including funding from angel investors does not exceed Rs10 crore.
The angel tax was introduced in the Finance Bill of 2012 by then finance minister Pranab Mukherjee. Funds which were raised by an unlisted company through issuing shares were covered under this tax to the extent the amount is in excess of the fair market value. The companies would attract a corporate tax of 30%, because the additional funds were reported as other income. Many startup valuations are far in excess of market valuations as they are based on the promise of the idea and not its immediate worth. In such a case, they would end up losing a chunk of inflow to the tax.
Redefining startups in India, the government said that a business entity in India shall be considered as a startup up to a period of seven years from the date of its incorporation or registration (as defined in the Companies Act, 2013 or registered as a partnership firm under Sction 59 of the Partnership Act, 1932 or a limited liability partnership under the Limited Liability Partnership Act, 2008) in India. In biotechnology space, this period will be ten years.
The government said that a startup should not exceed turnover of ₹25 crore in any fiscal year since the date of its incorporation. For validation, a startup shall make an online application over the mobile app or portal set up by the Department of Industrial Policy and Promotion. A company incorporated on or after 1st April 2016 can claim 100% tax exemption after the new notification.
Note that, only firms certified as startups under new government norms will be exempt from ‘Angel tax’ and are eligible for other tax-related benefits. These startups must work towards “innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.”
Prime Minister Narendra Modi launched the Startup India initiative in January 2016, and one of its main aim was to create employment, but it was not included as a mandatory requirement. According to a Hindu Business Line report, as on January 2018, 6,096 entities have been recognised as startups by the DIPP and 74 have been approved for tax benefits by the ministry.
We had earlier pointed out that this kind of exemption would not really provide any relief for startups, as for how does the government decide if a startup is ‘innovative’ or not? Some startups may not have an original idea, but can execute it well.