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Key takeaways from the Angel Tax proposal

Key takeaways from the Angel Tax proposal

Tax & Auditing

Priyanka Srivastava

Priyanka Srivastava

8 May 2019, 10:17 — 5 min read

Background: Angel tax is levied when a private company (unlisted) raises funds where the share price is at higher rate than its fair valuation. The current rate of Angel Tax in India is 30%. Owing to implementation of this tax, numerous Indian startups and small enterprises have received notices from the Income Tax Department to pay the due tax. Many of them have been asked to pay a penalty for not filing the tax on time. The interim budget 2019 was expected to ease the Angel Tax issue and on 19 February 2019, the government took a step towards this promise and relaxed norms for startups facing the brunt of Angel Tax and also expanded the eligibility of companies that can benefit from this change. In this article, Priyanka Srivastava shares some key takeaways from the Angel Tax proposal.

Commerce and Industry Minister, Mr Suresh Prabhu cleared a proposal on 19 February 2019, encouraging investments in startups and simplifying the process of exemption under section 56(2) of Income Tax Act. This will be issued as a gazette notification by Department for Promotion of Industry and Internal Trade (DPIIT). Under the new rules, startups will be kept out of the purview of an anti-tax evasion provision in the Income Tax Act, 1961, under which share premium received beyond the fair value is taxed at 30%.

Below are the broad guidelines issued:

 

1. Investments up to INR 25 crore will be exempted from section 56 (2) (vii b) of the Income Tax Act, which was INR 10 crore before.

 

2. Startups with sales of up to INR 100 crore—earlier, the exemption limit was INR 25 crore—would be eligible for the tax relief. An entity will be considered a startup eligible for relief for up to 10 years from the date of incorporation, up from the earlier seven years. Such entities would not be questioned about the share premium they receive if they are registered with the  DPIIT.

 

3. 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, jewelry or on vehicles priced above INR 10 lakh other than those used by the entity in the ordinary course of business.

 

4. The government has decided to exempt Angel Tax from the receipts of startups from share sales to listed firms with net worth of INR 100 cr or annual sales of INR 250 cr.

5. Premium received from non-residents and alternative investment funds - category 1 registered with the Securities and Exchange Board of India (SEBI) will also be eligible for the exemption.

 

6. Startups have to file a declaration with DPIIT seeking relief, which it would then share with the tax department. The aggregate limit of INR 25 cr will exclude consideration received by eligible startups for the following classes of persons:

  • Non-residents
  • Alternative investment funds: Category-I registered with SEBI
  • Listed company having a net worth of INR 100 cr or turnover of at least INR 250 cr provided that its shares are frequently traded as per SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

 

7. The relief from the Angel Tax will be available to all eligible startups retrospectively, with the government deciding not to pursue such cases until their appeals are disposed of.

 

Check out more related articles:

Presumptive taxation scheme under section 44AD of Income Tax Act: Who should not file? 
6 limiting financial beliefs that prevent SMEs from achieving business success
6 Tips to improve the financial health of your business

 

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Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views, official policy or position of GlobalLinker.

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Priyanka Srivastava

Founder and Owner of caMattersOnline, one of the fastest growing organization in the Finance and Accounting space in the Industry. caMattersOnline offers compliance service...

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