Incentives given to STARTUPS in India
The slogans like “MAKE in INDIA” and “the Startup Campaign” were promoted by the Prime Minister of India to boost entrepreneurship, the bright future of India. There is no doubt about the fact that the Indian Government is the world leader when it comes to facilitating budding entrepreneurs. And the result of the same is visible looking at the successful entrepreneurs India has given in the last few decades. After the speech of respected Finance Minister, Nirmala Sitharaman, the intention of the Government got more visibility that they want to create a good platform for the startups and inturn the boost the Indian economy.
What do you understand by angel tax?
As per section56(2)(viib) of income tax act 1961 –
It is a tax levied on the unlisted companies for raising capital by issuing shares from the market. Tax is levied when the issue price exceeds the fair market value. Then the excess realization would be treated as income in hands of the issuer. And it will be taxed as income from other sources known as angel tax for angel investors investing in startups.
The above mechanism of taxation did not go well with the start-up companies, as it is quite common that when the idea of a startup becomes successful, private investors will invest a huge amount of money in lieu of share capital.
The difference in fair value arises because Income tax authorities use Rule 11U & Rule 11UA while the investors value the firm as per discounted cash flow methods or by looking at the future avenues of success.
Note: Angel tax will be applicable only on investments made by resident investors.
What is the rate of tax for angel tax?
Tax is calculated at the rate of 30.9% on net investments in excess of the fair market value.
Angel tax will not be applicable if investments are made by
⇒ Venture capital undertaking from a venture capital company or a venture capital fund; or
⇒ A non-resident of India; or.
⇒ Domestic Investor in a start-up company which is approved by an Inter-Ministerial panel and exempted from angel tax by Government.
- The paid-up share capital & share premium of the start-up should not exceed Rs. 10 crores after shares are issued.
- The start-up should procure the fair market value certified by a merchant banker.
- The resident investor should have a minimum net worth of Rs. 2 crores and the average income in the last 3 financial years should not be less than Rs. 50 lakh.
- The start-up should be approved by at least 8 members of the inter-ministerial board for angel tax exemption.
⇒ Angel tax provisions u/s 56(2)(viib) of the Income-tax Act for start-ups and their investors shall not be applicable to a startup registered with DPIIT.
⇒ A dedicated cell under a Member of CBDT will be set up for addressing the problems faced by startups and their investors. A startup who has any issue relating to the provision of Income-tax for a quick resolution.
⇒ Provision of section 56(2)(viib) of the Income Tax Act shall not apply to startups registered with the commerce ministry. Hence the monitory condition is now removed.
What are the tax exemptions given to the eligible start-ups?
Following tax exemptions are given to eligible startups :
⇒ Tax Holiday u/s 80IAC – Start-ups are eligible for a 100% tax rebate for a period of three years in a block of seven years provided that annual turnover does not exceed Rs 25 crores in any financial year.
⇒ Exemption from tax on LTCG u/s 54EE – A new section 54 EE has been inserted in the Income Tax Act for the eligible startups to
exempt their tax on a long-term capital gain if such a long-term capital gain or a part thereof is invested in a fund notified by Central Government within a period of six months from the date of transfer of the asset. The maximum amount that can be invested in the long-term specified asset is Rs 50 lakh. Such amount shall remain invested in the specified fund for a period of 3 years. If withdrawn before 3 years, then the exemption will be revoked in the year in which money is withdrawn.
⇒ Tax exemption to Individual/HUF on investment of LTCG in equity shares of Eligible Start-ups u/s 54GB – The existing provisions u/s 54GB allows the exemption from tax on long-term capital gains on the sale of a residential property if such gains are invested in the small or medium enterprises as defined under the Micro, Small and Medium Enterprises Act,2006. But now this section has been amended to include exemption on capital gains invested in eligible start-ups also.
Thus, if an individual or HUF sells a residential property and invests the capital gains to subscribe to the 50% or more equity shares of the eligible startups, then tax on long term capital will be exempt provided that such shares are not sold or transferred within 5 years from the date of its acquisition. The startups shall also use the amount invested to purchase assets and should not transfer the asset purchased within 5 years from the date of its purchase. This exemption will boost the investment in eligible startups and will promote their growth and expansion.
⇒ Set off of carry forward losses and capital gains allowed in case of a change in the Shareholding pattern – The carry forward of losses in respect of eligible start-ups is allowed if all the shareholders of such company who held shares carrying voting power on the last day of the year in which the loss was incurred continue to hold shares on the last day of the previous year in which such loss is to be carried forward. The restriction of holding of 51%voting rights to be remaining unchanged u/s 79 has been relaxed in the case of eligible startups.
The Finance Minister shall also consider framing similar tax provisions for startups that are not DPIIT registered. There shall also be a provision that provides benefit to persons who are not categorized as angel investors and would like to invest in startups that are not DPIIT registered. This is common in tier II, III cities.