start-up-and-angel-tax.js
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import PageBanner from "@/components/reuseables/PageBanner";
import Image from "next/image";
import Link from "next/link";
import React from "react";
const banners = [
{
imageSrc: "/images/banner/blog.webp",
pageTitle: "Start-up and Angel Tax",
homePageUrl: "/blog",
homePageText: "Blog",
activePageText: "Start-up and Angel Tax",
},
];
const Angeltax = () => {
return (
<>
<PageBanner banners={banners} />
<div className="blog-details-area ptb-100">
<div className="container">
<div className="row">
<div className="col-lg-12 col-md-12">
<div className="blog-details-desc">
<div className="article-image">
<Image
src="/images/blog/blogs3.jpeg"
layout="fill"
alt="image"
className="image-fluid image"
/>
</div>
<div className="article-content">
<div className="entry-meta">
<ul>
<li>
<i className="ri-shield-user-line"></i>
<p>By Advith Consulting</p>
</li>
<li>
<i className="ri-calendar-2-line"></i>
<p>Aug 15, 2024</p>
</li>
</ul>
</div>
<h3>1. Background</h3>
<p>
With the aim of fostering entrepreneurship and promoting
innovation by creating an ecosystem that is conducive for
growth of start-ups and to enable India to become a nation
of job creators instead of a nation of job seekers, the
Government of India launched the "Start-up India" initiative
on 16th January 2016. Recognizing the importance of these
start-ups, the Finance Minister in the Interim Budget, 2019
presented on 1st February, 2019 stated that, "With job
seekers becoming job creators, India has become the world's
second-largest start-up hub. We are proud of the hard work
and innovative ideas of our youth."
</p>
<h6 className="blog-pointer">What is Angel Tax?</h6>
<p>
To keep a check on the closely held companies from bringing
in undisclosed income into the company by issuing the shares
at abnormal premium, Section 56(2)(viib) was introduced into
the Income Tax Act, 1961 by the Finance Act 2012. According
to this, whenever a closely held company issues shares to
resident investors at a price that is over and above the
Fair Market Value (FMV), the amount received in excess of
the FMV will be treated and chargeable to tax as Income from
Other Sources. In order to arrive at the FMV, valuation
methods were prescribed under the Income Tax Rules, and the
certificate for the same is to be obtained from a Merchant
Banker. This taxation provision was loosely called as 'angel
tax'. Para 11(a) of SA 240 defines fraud as an intentional
act by one or more individuals among management, those
charged with governance, employees, or third parties,
involving the use of deception to obtain an unjust or
illegal advantage.
</p>
<h6 className="blog-pointer">Start-up and Angel Tax</h6>
<p>
The Department for Promotion of Industry and Internal Trade
(DPIIT) was entrusted with the responsibility to administer
the Start-up India scheme. DPIIT issued various
notifications which defined the word start-up and mentioned
the procedure to obtain recognition as a start-up with
DPIIT. As per those notifications, as applicable today, the
entity, i.e., a Private Limited Company or a Registered
Partnership Firm or an LLP shall be considered a start-up:
</p>
<ul>
<li>
Up to 10 years from the date of its
incorporation/registration
</li>
<li>
The turnover for any financial year does not exceed INR
100 crores
</li>
<li>
It is working towards innovation, development or
improvement of products or processes or services, or if it
is a scalable business model with a high potential for
employment generation or wealth creation.
</li>
</ul>
<h6 className="blog-pointer">
Tax Notifications and action taken by Tax Officers
</h6>
<p>
Following the DPIIT notification, the Central Board of
Direct Taxes (CBDT) issued a notification in 2016, exempting
the 'start-ups' from angel tax that receive funding from
angel investors/fund houses or any person resident in India,
which satisfies all the above conditions. The tax officers,
however, started invoking angel tax provisions in case of
start-up by rejecting/modifying the valuation reports that
they submitted. The tax officers chose to make such
additions by alleging that subsequent actual revenues do not
match up to the projections carried out in the valuation
workings. Widespread representations were made against such
a regressive approach adopted by the tax authorities. In
response to that, CBDT brought out an instruction on 6th
February, 2018 as to not take any coercive measures to
recover the outstanding demand against these start-ups and
directed that necessary administrative steps be taken for
the cases that were pending before the Appellate authority
for expeditious disposal.
</p>
<p>
To make the provisions more start-up friendly, DPIIT brought
out another notification on 11th April, 2018 specifying
conditions and procedures for seeking exemption from angel
tax provisions. This, however, did not solve the problems
that start-ups faced, as the tax authorities continued to
make tax assessments in the same manner as earlier. This
again was picked up by influencers on social media like Mr.
Mohandas Pai and Mr. Anand Mahindra, who objected to this
practice carried out by the tax authorities. This was
responded to by Mr. Suresh Prabhu, Union Minister for
Commerce and Industry, which prompted further amendments,
which were made on 16th January, 2019 and subsequently all
the earlier notifications were superseded by a fresh
notification that was released on 19th February, 2019.
</p>
<h6 className="blog-pointer">
This notification puts the following conditions for a
start-up company to be exempt from angel tax:
</h6>
<ul>
<li>
Exemption from clutches of Section 56(2)(viib) [angel tax]
shall be available if such company is a start-up as
recognized by DPIIT based on the conditions mentioned
earlier.
</li>
<li>
The aggregate amount of the paid-up capital and the share
premium after the proposed issue should not exceed INR 25
crores. In computing the threshold of INR 25 crores, the
following is not counted:
</li>
<ul>
<li>
Shares issued to Non-residents or Venture Capital
companies or funds, to whom the provisions of angel tax
do not apply at all.
</li>
<li>
Shares issued or proposed to be issued to companies
whose shares are frequently traded on the stock exchange
and whose net worth on the last day of the previous
financial year exceeds INR 100 crores or turnover
exceeds INR 250 crores.
</li>
</ul>
<li>
Such start-up has not invested in any of the following
assets:
</li>
<ul>
<li>
Land or building or both unless it is used in the
ordinary course of business.
</li>
<li>
Loans and advances, other than loans in the ordinary
course of its business where the start-up has lending as
its substantial business activity.
</li>
<li>Capital contribution into another entity.</li>
<li>Shares and securities.</li>
<li>
Any vehicle, aircraft or yacht whose actual cost exceeds
INR 10 lakhs, unless it is a start-up in the business of
selling, plying, hiring, or leasing of such vehicles.
</li>
<li>
Jewelry, other than held as stock for its business.
</li>
<li>
Other assets like drawings, paintings, archaeological
collections, etc.
</li>
</ul>
</ul>
<p>
Also, no such investment is made by the start-up for a
period of 7 years from the date of issue of shares at a
premium, where the exemption from angel tax has been
availed.
</p>
<h6 className="blog-pointer">Conclusion</h6>
<p>
It was expected that this year’s budget will bring in more
rationalization into the application of angel tax
provisions. Since it was only an interim budget presented on
1st February 2019, no such amendments were proposed in this
interim budget. Hopefully, a more conducive taxation regime
will evolve in the future, which will help genuine start-ups
raise funds without having to worry about angel tax. This,
in turn, will help start-ups flourish further, spark more
innovation, employment, and economic progress. However, it
is also important to ensure that malpractices using the
route of investment raise are also kept in check.
</p>
<p>
It is also a very welcome fact that the Government responded
to the industry by bringing in modifications to the mode of
implementation of angel tax by moving very swiftly. Further,
it is also very important to note that the regime has moved
from "Application seeking exemption from angel tax" to
"Declaration", which means that there is a thrust on
self-declaration for eligible start-ups to avail the
exemption from angel tax.
</p>
<div className="article-footer">
<div className="article-tags">
<Link href="/blog">Consulting</Link>
<Link href="/blog">Business</Link>
<Link href="/blog">Market</Link>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</>
);
};
export default Angeltax;