Govt may hike angel tax exemption to Rs 25 crore from Rs 10 crore

The Department for Promotion of Industry and Internal Trade (DPIIT) and Central Board of Direct Taxation (CBDT) are likely to increase the threshold for startups to get exemption from the so-called Angel Tax. In what would come as a relief for startups, if the share premium of the company does not exceed Rs 25 crore, up from its earlier limit of Rs 10 crore, they will get immunity from the taxation.The exemptions will be made based on the submission of audited financials and income tax returns by a startup, along with a self certified declaration that the angel funds raised by the firm have and will not be used for inappropriate purchases. This is based on a submission made by LocalCircles and iSPIRT, people aware of the discussions told ET.

The move is expected to provide relief to a majority of startups who over the past few months have received notices from the I-T Department to pay tax on the capital they’ve raised from angel investors.

The working committee put in place by DPIIT secretary Ramesh Abhishek on February 4, with the aim to accept suggestions and come up with solutions for the issue, also agreed to redefine startups as any entity incorporated for a period of up to 10 years, with turnover not exceeding Rs 50 crore.
Under the previous definition, the government of India recognised a startup as an entity incorporated less than seven years ago with a turnover of less than Rs 25 crore. A notification from the Ministry of Commerce and Industry announcing these changes is expected to come as soon as February 11.

“What they’ve agreed to is a blanket exemption of 25 crore in share premium for a DPIIT registered startup, regardless of the source - whether it’s from an individual, friends and family, unlisted company, etc, the CBDT will not question that,” said a person aware of discussions which took place on February 8. “This is going to be retrospective as well, meaning any startup that has a pending order, they can submit the required documents and the commissioner of appeals needs to take it into consideration.”
Another exemption which could make it into the new guidelines could be based on whether the capital infused into the startup came from an accredited investor. The DPIIT could follow the definition given by SEBI, which says an accredited investor is anyone with a net worth of more than Rs 2 crore.

Following the introduction of the new guidelines, startups might need to submit audited financials and income tax returns of the previous year, along with a self certified declaration that the angel investment raised by them will not be used to buy real estate assets of any kind, premium cars with value above Rs 10 lakh, gold Bullion, diamonds, precious metals or jewellery of any kind, listed or unlisted securities and arts/coins.
“LocalCircles along with iSPIRT has made a submission on behalf of the startups on our platform that full exemption must be given from section 56(2)viib up to a certain amount of share premium on the basis of submission of ITR, audited financials and an investment declaration form”, said Sachin Taparia, Founder of LocalCircles. “We are hopeful that DIPP and CBDT will soon bring these changes.”