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Demon then, Angel now! Govt widens tax net, expands the ambit of startup definition

The government Tuesday eased rules for startups by announcing a string of exemptions which includes the contentious and much debated issue of Angel Tax

Sonal Khetarpal |February 19, 2019 | Updated 19:09 IST
Demon then, Angel now! Govt widens tax net, expands the ambit of startup definition
Union Minister of Commerce & Industry Suresh Prabhu in a series of tweets widened the definition of startups amongst a host of other clarifications.

The Minister for Commerce and Industry Suresh Prabhu has cleared the proposal to simplify the exemptions for start-ups under Section 56(2) (viiB) of Income Tax Act-a clause that has been a bone of contention in the start-up world, since it was introduced in 2012.

Section 56(2)(viib) of the Income Tax Act provides that the amount raised by a start-up in excess of its fair market value would be deemed as income from other sources and would be taxed at 30 per cent.

Now with the new notification, all investments made up to Rs 25 crore will be exempt from any form of scrutiny from the government. This move will encourage the angel investments in country that are crucial to catalyse the start-up ecosystem.

In another cheerleading act, the government has expanded the ambit of what constitutes a start-up. An entity shall be considered a start-up up to 10 years from its date of incorporation/registration instead of the previous period of 7 years. Similarly, an entity will be a start-up if its turnover for any of the fiscal years since it got registered/incorporated was below Rs 100 crore, in place of Rs 25 crore earlier.

However, there are certain exceptions. A start-up cannot invest in a building or land unless it is for its business or used by it for purposes of renting or held by it as stock-in-trade. It also cannot offer loans or advances, other than those where lending money is part of its business. A start-up also cannot make any capital contribution to any other entity or invest in shares, car, any vehicle or mode of transport that costs more than Rs 10 lakh.

This ensures the CBDT's concerns that start-ups will not be used for money laundering or doesn't receive investment from shell companies for tax evasion.

Also Read: Relaxation in start-ups listing norms to unshackle angel investing: industry

Saurabh Srivastava, Chairman, Indian Angel Network says that this announcement will unleash the next wave of entrepreneurship, making India the number one start-up nation in the world. He says that the current announcement is an excellent solution as it takes away two major pain points for start-ups.

Firstly, there is no case by case clearance, which was time consuming and not practical. Secondly, valuation has been removed as criteria. This was a major concern as it needed certification by merchant bankers, who had no idea about it, as valuation is an art and a science and a result of the negotiations between the company and their investors.

The Rs 25 crore threshold is wide to cover almost all angel investments as most of them are less than this number. And with listed companies now able to invest in start-ups without angel tax, this is a very comprehensive and elegant solution.

These relaxations are in line with the government's vision to promote the culture of entrepreneurship and ease of doing business in India.

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