The Government of India introduced ‘Start-up India’ initiative for creating a conducive environment for the start-up companies in India. The CBDT inserted Section 80-IAC in I-T Act vide Finance Act 2016. This provision provides for 100% tax deduction in respect of profits of start-ups which are approved by Department of Industrial Policy and Promotion (DIPP).
The start-ups had been receiving notices from the Dept. for levying tax on proceeds received by them by issuing shares to investors at inflated prices. The Assessing Officers were making additions in the residuary income of start-ups under section 56(2)(viib) by rejecting their abnormal share valuations (herein after referred to as ‘Angel tax’).
Since a start-up is valued on the basis of the business potential of its idea, applying section 56(2)(viib) to recover the tax on pretext of inflated valuation would be prejudicial to the interest of the start-ups. Thus, the DIPP provided relief to them by issuing notification G.S.R. 364(E) dated 11-04-2018. It requires start-ups to file new Form-1 and Form-2 in order to claim tax incentives. The application in Form-1 shall be filed along with prescribed documents before CBDT to obtain a tax exemption certificate under Section 80-IAC while Form-2 has to be filed to claim exemption from the applicability of provision of Angel tax. The notification also prescribed certain conditions which have to be fulfilled by the start-ups and their investors in order to become eligible to file these Forms.
Despite this relief, various start-ups received fresh income-tax notices under section 56(2)(viib). The DIPP took up this matter with the Department of Revenue (DoR) to stop any kind of harassment to start-ups. Consequently, the DIPP issued a new notification simplifying the process for seeking exemption from applicability of Angel tax. The DIPP has substituted Para (4) of its earlier issued Notification no. GSR 364(e) which provides for conditions to be fulfilled by the start-up cos. and investors for claiming exemptions.
The relaxations provided by the DIPP’s new notification, which shall be in force from January 16, 2019, are enumerated in subsequent paragraphs.
The exemption from Angel tax has been extended to all previous investments as well. Earlier, a start-up could claim exemption from Angel tax only in respect of its proposed issue of shares. The new notification extends the benefit for both, existing issues and shares proposed to be issued by the start-ups.
The start-up companies shall not be required to obtain a valuation report from merchant bankers. The condition of obtaining a report from a merchant banker specifying the fair market value of shares in accordance with Rule 11UA of the Income-tax Rules, 1962 has been withdrawn by the DIPP.
The Central Board of Direct Taxes (CBDT) has also been mandated to grant approval of exemption within a period of 45 days from the date of receipt of application in Form 2.
The threshold limit of paid-up share capital of start-up remains unchanged in the new notification. The aggregate amount of paid-up share capital and share premium of the start-ups after the proposedissue of shares should not exceed Rs. 10 crore in order to become eligible for tax exemption.
The investors should have returned income of Rs. 50 lakhs or more in the financial year immediately preceding the year of investment. Earlier this limit was Rs. 25 lakhs which shall be calculated by taking average of returned income of preceding 3 financial years. Further, the net worth of an investor, as on the last date of the financial year, immediately preceding the year of investment/proposed investment, should be Rs. 2 crore or amount of investment made (or proposed to be made) in the startups, whichever is higher. Earlier, they were required to have net worth of Rs. 2 crore or more as on the last date of the preceding financial year.
Though it is noteworthy that the revenue requirements being increased from an average of 25 lakh in the past three years to 50 lakh in the past one year will see many startups being ineligible