The Department for Promotion of Industry and Internal Trade (DPIIT) vide its press release dated 19 February 2019 has shared that the Minister of Commerce & Industry and Civil Aviation, Suresh Prabhu has cleared a proposal for simplifying the process of exemptions Start-ups under Section 56(2)(viib) of the Income Tax Act, 1961.
Earlier, the DPIIT had also issued notification number GSR 34(E) dated 16 January 2019 to provide relaxations with respect to exemptions from taxation of angel investments. However, the Indian Start-up community widely considered that further relaxations were required and several industry pressure groups had been in constant deliberations with government agencies to push for further reforms.
A round-table was organized on 4 February 2019 under the chairmanship of Secretary DPIIT with Start-ups, angel investors, and other stakeholders with a view to discuss the new measures undertaken by the DPIIT to address the Angel Tax issue and understand the mechanism to deal with it institutionally.
Vide gazette notification number GSR 127(E) (the “Notification”), the Ministry of Commerce and Industry, in supersession of the earlier Notification number GSR 34(E) has amended the Start-up Policy (GSR 364(E), dated 11 April 2018) to provide for the following key relaxations:
Broadening of the definition of ‘Start-up’ and revamp of recognition process
The definition of Start-ups will be expanded. Now an entity will be considered as a Start-ups up to a period of 10 years from the date of incorporation and registration in place of the earlier duration of 7 years.
Such an entity will continue to be recognised as a Start-up, if its turnover for any of the financial years since incorporation and registration has not exceeded INR 100 Crores in place of INR 25 Crores earlier.
The process of recognition of an eligible entity as Startup has also been simplified, the steps for DPIIT recognition now are as follows:
- Online application over mobile app or portal set-up by DPIIT;
- Application to be accompanied by a copy of Certificate of Incorporation or Registration, and a write-up about the nature of business and how it is working towards innovation and other criteria for recognition;
- The DPIIT may after calling for further documents or after making further enquiries may grant or reject the recognition request. In case of rejection, reasons will have to be stated.
Relaxations wrt Section 56(2)(viib)
All Start-ups recognized by DPIIT will be eligible for the exemption under Section 56(2)(viib) of the Income Tax Act, 1961. The aggregate amount of paid up share capital and share premium of the startup after the issue or proposed issue of shares should not exceed INR 25 Crores.
The abovementioned limit of INR 25 Crores as aggregate amount of paid up share capital and share premium, shall not include any considerations, meaning thereby the Start-ups may raise tax-free capital, from the following entities:
- Venture capital company or a venture capital fund;
- Listed company having a net worth of INR 100 Crores or turnover of at least INR 250 Crores, provided that its shares are frequently traded as per SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
However, the Start-up availing the exemption must not be investing in any of the following assets:
- Building or land appurtenant thereto, being a residential/ non-residential property, other than that used by the Start-ups for the purposes of renting or held by it as stock-in-trade, in the ordinary course of business
- Loans and advances, other than loans or advances extended in the ordinary course of business by the Start-ups where the lending of money is substantial part of its business
- Capital contribution made to any other entity
- Shares and securities
- Any motor vehicle, aircraft, yacht or any other mode of transport, the actual cost of which exceeds INR 10 Lakhs, other than that held by the Start-ups for the purpose of plying, hiring, leasing or as stock-in-trade, in the ordinary course of business
- Jewellery other than that held by the Start-ups as stock-in-trade in the ordinary course of business
- 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
It is to be noted that the Notification also requires the Start-up to not invest in any of the above-mentioned assets for a period of 7 years from the end of the latest financial year in which the shares are issued at a premium.
Mode for availing exemption:
Any prior approval from any government agency to avail the exemption has also been done away with. The eligible Start-ups may file a duly signed self declaration in Form 2 annexed in the Notification, with the DPIIT for availing the tax exemption. The declaration shall thereafter be transmitted by the DPIIT to Central Board of Direct Taxes (CBDT).
Scope of the Notification:
The Notification shall apply irrespective of the dates on which the shares are issued by the Start-up from the date of its incorporation, except for the shares in respect of which an assessment order has been made under Income Tax Act, 1961.
Author: Mr. Avaneesh Satyang
Press Release: https://dipp.gov.in/sites/default/files/press_release_19022019.pdf
Gazette Notification: http://egazette.nic.in/WriteReadData/2019/198133.pdf