On 19.02.2019, Ministry of Commerce & Industry (DPIIT) issued a notification regarding relief for startups from angel tax which shall be effective from 19.02.2019. The notification further expanded the definition of Startups & prescribed certain conditions for Qualifying for claiming exemption.
What is Angel Tax?
Angel Tax is levied on the capital raised by unlisted companies through issuing of shares when the shares price seen is excess of the fair market value of the shares sold. It is considered as Income from other sources for the purposes of the Income tax act, 1961. The Angel Tax Provision is as follows:
S. 56 (2) (viib):
(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head “Income from other sources”, namely :—
(viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares:
Provided that this clause shall not apply where the consideration for issue of shares is received—
(i) by a venture capital undertaking from a venture capital company or a venture capital fund; or
(ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf.
Explanation.—For the purposes of this clause,—
(a) the fair market value of the shares shall be the value—
(i) as may be determined in accordance with such method as may be prescribed16; or
(ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature,
whichever is higher;
Definition of Startup:
Startup is an entity:
• Upto 10 years from the date of incorporation, incorporated as a Private Limited Company or partnership firm or LLP in India.
• Turnover has not exceeded Rs. 100 Cr. in any of the financial years since incorporation.
• Engaged in innovation, development or improvement of products or processes or services.
• If the business model is scalable with high potential of employment or wealth creation.
It is further specified that an entity formed after reconstruction or splitting up of an existing business is not a startup.
The natural corollary of the above is that after completion of 10 years or exceeding turnover above Rs. 100 Cr., a startup shall be cease to be a startup.
Process of recognition:
• Online application over the mobile app or on the portal
• Documents to be accompanied with application – certificate of Incorporation or registration & write up about the nature of business highlighting how it is working towards innovation, development or improvement of products or processes or services, or its scalability in terms of employment generation or wealth creation.
• DPIIT after the due process will either recognise as startup or reject the application.
Certificate for the purposes of S. 80-IAC of the Income tax act, 1961
Apply in Form-1 along with the specified documents. After application, the board will either grant the certificate or reject the application.
Conditions for claiming exemption from S. 56 (2) (viib) (Angel Tax Provision)
• Startup is recognised by DPIIT.
• Aggregate amount of paid up share capital & share premium after the issue or proposed issue does not exceed Rs. 25 Cr.
• The amount of paid share capital & share premium from a non-resident & a venture capital company or venture capital fund is excluded from the above Rs. 25 Cr. limit.
• Further the consideration received from specified company in return of shares issued is also excluded from above Rs. 25 Cr. Limit.
• Not invested in any of the following assets:
o building or land appurtenant thereto, being a residential house, other than that used by the Startup for the purposes of renting or held by it as stock-in-trade, in the ordinary course of business;
o land or building, or both, not being a residential house, other than that occupied by the Startup for its business or used by it for purposes of renting or held by it as stock-in trade, in the ordinary course of business;
o loans and advances, other than loans or advances extended in the ordinary course of business by the Startup where the lending of money is substantial part of its business;
o capital contribution made to any other entity;
o shares and securities;
o a motor vehicle, aircraft, yacht or any other mode of transport, the actual cost of which exceeds ten lakh rupees, other than that held by the Startup for the purpose of plying, hiring, leasing or as stock-in-trade, in the ordinary course of business;
o jewellery other than that held by the Startup as stock-in-trade in the ordinary course of business;
o 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.
• Further restriction is provided to not to invest in these assets for 7 years from the end of the financial year in which the shares are issued at premium.
Duly signed declaration is to file in Form-2 with DPPIT mentioning that the conditions mentioned above are fulfilled.
• Certificate of recognition can be revoked if false information is furnished.
• Exemption can be revoked if the entity invests in the abovementioned assets before the end of 7 years from the end of the financial year in which the shares are issued at premium.
The Government will carry out a review of this notification on or before 31.03.2021.
FORM-1 – Application for certificate for the purposes of section 80-IAC of the Income-tax Act, 1961
• Name of the Startup
• Date of incorporation/ registration of Startup
• Incorporation No./ registration No.
• Address and business location
• Nature of business
• Contact details of Startup (Phone No. and Email)
• Permanent Account No.
• Existing/ proposed activities