Proposal cleared for DPIIT registered Start-up to get exemption from Angel Tax, definition of Start-ups widened

The Department for Promotion of Industry and Internal Trade (DPIIT) vide its press release dated 19 February 2019 (Gazette notification is awaited) 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 364 (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.

The DPIIT has also stated the changes shall be soon notified vide appropriate gazette Notification, which is expected soon.

As per the Press Release the key changes to be brought in by the Notification are as follows:

Broadening of the definition of ‘Start-up’

The definition of Start-ups will be expanded. Now an entity will be considered as a Start-ups upto a period of ten 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.

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 consideration so received for the proposed issue or issuance of shares shall be exempt up to an aggregate limit of INR 25 Crores.

The abovementioned limit of INR 25 Crores shall not include any considerations, meaning thereby the Start-ups may raise tax-free capital, from the following entities:

  1. Non-Residents
  2. Alternative Investment Funds- Category-I registered with SEBI
  3. 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:

  1. 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
  2. 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
  3. Capital contribution made to any other entity
  4. Shares and securities
  5. 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
  6. Jewellery other than that held by the Start-ups as stock-in-trade in the ordinary course of business
  7. 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

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 with the DPIIT for availing the tax exemption. The declaration shall thereafter be transmitted by the DPIIT to CBDT.


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