Hello folks, We are here again with Part – II of this blog on Angel Tax. Let’s start with Tax Exemptions:

  • Income Tax Exemption on profits under Section 80-IAC of Income Tax Act: The profits of an eligible startups are eligible for deductions for any three consecutive years out of seven years beginning from the year in which such entity is incorporated, provided the company is incorporated after March 31, 2016 but before April 1, 2021. The deduction shall be allowed for 100% of the profits from such business. This deduction is allowed subject to filing of an application in Form-1 along with documents specified therein to the Board.
  • Income Tax Exemption on investments above fair market value received under Section 56 of Income Tax Act( (Exemption from angel tax to Startups)
  • The start-up companies command high securities premium while issuing shares, which are backed up by their innovative ideas. Such practice is occasionally questioned by the Income-tax dept. as it could be with an intent to convert the undisclosed money of promoters or shareholders by issuing shares at high premium. On the other hands, if provisions of Section 56(2)(viib) are invoked in genuine cases to recover the tax on pretext of inflated valuation, it would be prejudicial to the interest of the start-ups and would be burden on its cash flows. Therefore, The Govt. has also relaxed the conditions to claim the exemption from the applicability of angel tax. A closely held company shall not be liable to pay angel tax if the aggregate amount of paid-up share capital and share premium, after issue or proposed issue of shares, does not exceed Rs. 25 crores. Earlier, this limit was Rs. 10 crores. The aggregate limit of Rs. 25 crores will exclude the considerations received from the following classes of persons:

 1)  Non-Residents 

2)  Venture capital company/venture capital fund

 3)  Listed company having net worth exceeding Rs. 100 crores (on the last date of preceding financial year) or turnover exceeding Rs. 250 crores (in preceding year)

  • Restriction on Investment

The new notification restricts the start-up claiming exemption from angel tax, from investing in any of the following assets:

 1.  Land or building, being a residential house, other than that used for the purposes of renting

 2.  Land or building, not being a residential house, other than that occupied by start-up for its business or    renting

 3.  Loans and advances, if start-up isn’t engaged in ordinary business of lending of money

 4.  Capital contributions made to any other entity

 5.  Shares and securities

 6.  Motor vehicle, aircraft, yacht or any other mode of transport, if the cost of such an asset exceeds Rs. 10 lakhs.

 7.  Jewellery

 8.  Archaeological collections, drawings, paintings, sculptures, any work of art or bullion

 9.  any other asset, whether in the nature of capital asset or otherwise, of the nature specified in sub-clauses (iv) to (ix) of clause (d) of Explanation to clause (vii) of sub-section (2) of section 56 of the Act.

The period of restriction in making investment in the above mentioned assets shall be of 7 years from the end of the Financial year in which share are issued at premium. However, the above conditions are not applicable in case start-up holds the above assets as stock-in-trade, in its ordinary course of business. In case the Startup files a declaration in Form-2 and subsequently invests in any of the assets specified above before the end of seven years from the end of the latest financial year in which the shares are issued at premium, the exemption provided under section 56(2)(viib) of the Act shall be revoked with retrospective effect.

  • Simplified compliances

As per existing Notification, a start-up was required to file Form 1 (to claim Section 80-IAC deduction) and Form 2 (to claim exemption from angel tax). The start-ups were required to file application in Form 2 along with prescribed documents with the DPIIT for obtaining approval to claim exemption from the applicability of provision of angel tax, which, in turn, was forwarded to the CBDT. The CBDT was required to grant approval within 45 days from date of receipt of Form 2.

The DPIIT has removed the requirement of filing of application in Form 2. Now, a start-up is just required to make a self-declaration in Form 2 before DPIIT. The DPIIT shall forward the same to the CBDT on receipt of such declaration.

Commentary:

Angle Investors can invest in start-ups without any net worth and Return of Income limit.  

Note – Mr. Ashwin Jain, Author of this article, is Income Tax Manager in ATMS & Co LLP, one of the biggest & most reputed Chartered Accountant firm In Mumbai.