AgenciesNEW DELHI: Angel investors have been exempted by the country’s income tax department, subject to certain conditions laid down by the Department of Industrial Policy and Promotion last month, providing significant relief to the early stage investor community.
In its notification dated May 24, the Central Board of Direct Taxes stated, “The Central Government, hereby notifies that the provisions of clause (viib) of sub-section (2) of section 56 of the said Act shall not apply to consideration received by a company for issue of shares that exceeds the face value of such shares, if the consideration has been received for issue of shares from an investor in accordance with the approval granted by the Inter-Ministerial Board of Certification.”
The tax relief impacts startups that are approved by an inter-ministerial panel, in which the paid up capital and the share premium of the beneficiary company does not exceed Rs 10 crore after the issue of shares. The notification comes into effect retrospectively from April 11, 2018.
However, it will now be compulsory for startup ventures to have merchant banker-validated valuations, to determine the fair market value of equity shares. In its recent amendment, chartered accountants have now been excluded to assess the same.
The issue surrounding calculation of a startup’s fair value has been a major bone of contention. Currently, the fair value of a startup is being assessed by incometax officials at their discretion, which the ecosystem members point out, is being done in a completely arbitrary manner. Angel investors, too, will have to fulfill prescribed criteria. Only those investors with a minimum net worth of Rs 2 crore, or an average returned income of over Rs 25 lakh in the preceding three financial years are eligible for 100% exemption.
‘Angel tax’, or tax on capital raised by unlisted companies by issuing shares in excess of their ‘fair market value’, has been a contentious issue for startups for more than 18 months after the government exempted ‘innovative’ startups from this tax.
The latest notification will go a long way in establishing individual investors at par with venture capital funds — a long-standing demand from angel investor groups.
In late 2017, a number of startups received tax notices. As per a survey done by LocalCircles, 39% of 2,860 startups that took part in its survey said they received income-tax notices this year. Angel groups said they should be allowed to register as legal entities to make investments freely so that the trend of fall in angel-funding can be reversed.
In its notification dated May 24, the Central Board of Direct Taxes stated, “The Central Government, hereby notifies that the provisions of clause (viib) of sub-section (2) of section 56 of the said Act shall not apply to consideration received by a company for issue of shares that exceeds the face value of such shares, if the consideration has been received for issue of shares from an investor in accordance with the approval granted by the Inter-Ministerial Board of Certification.”
The tax relief impacts startups that are approved by an inter-ministerial panel, in which the paid up capital and the share premium of the beneficiary company does not exceed Rs 10 crore after the issue of shares. The notification comes into effect retrospectively from April 11, 2018.
However, it will now be compulsory for startup ventures to have merchant banker-validated valuations, to determine the fair market value of equity shares. In its recent amendment, chartered accountants have now been excluded to assess the same.
The issue surrounding calculation of a startup’s fair value has been a major bone of contention. Currently, the fair value of a startup is being assessed by incometax officials at their discretion, which the ecosystem members point out, is being done in a completely arbitrary manner. Angel investors, too, will have to fulfill prescribed criteria. Only those investors with a minimum net worth of Rs 2 crore, or an average returned income of over Rs 25 lakh in the preceding three financial years are eligible for 100% exemption.
‘Angel tax’, or tax on capital raised by unlisted companies by issuing shares in excess of their ‘fair market value’, has been a contentious issue for startups for more than 18 months after the government exempted ‘innovative’ startups from this tax.
The latest notification will go a long way in establishing individual investors at par with venture capital funds — a long-standing demand from angel investor groups.
In late 2017, a number of startups received tax notices. As per a survey done by LocalCircles, 39% of 2,860 startups that took part in its survey said they received income-tax notices this year. Angel groups said they should be allowed to register as legal entities to make investments freely so that the trend of fall in angel-funding can be reversed.
( Originally published on May 26, 2018 )
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