Investment from angel funds set to become viable as government relaxes tax

The government has eased the procedure for startups to seek income tax exemption on investments from angel funds as part of efforts to address concerns of budding entrepreneurs, official sources said. Various startup founders have recently claimed of receiving notices under Section 56(2) of the Income Tax Act from the I-T department to pay taxes on angel funds raised by them. "Commerce and Industry Minister Suresh Prabhu has approved a notification pertaining to this clause to make allowances for angel investors. A formal notification to this effect would be issued soon by the DIPP," sources said. To seek the exemption, a startup will apply, with all the documents, to the department of industrial policy and promotion (DIPP).

The application of the recognised startup shall be moved by the department to the Central Board of Direct Taxes (CBDT) with necessary documents. "CBDT has been mandated to grant exemption approval to the startup for the purposes of this clause or they can decline to grant such approval within a period of 45 days from the date of receipt of application from the DIPP," they said. The earlier procedure of applying to an inter-ministerial board of certification for approval under this clause has now been done away with. "Application procedure has been simplified by making application to CBDT through DIPP," they added. The earlier requirement of startup to submit report from merchant banker specifying the fair market value of shares has also been removed. As per the revised procedure, a startup which is recognised by the DIPP would be eligible to seek exemptions, subject to certain conditions.

Startups will have to provide account details and return of income for the last three years. Similarly, investors would also have to give its net worth details and return of income. The government has earlier allowed startups to avail full tax concession on investments up to Rs 10 crore from investors, including angel financiers. The conditions also include that "investor should have returned income of Rs 50 lakh or more for the financial year preceding the year of investment; and net worth exceeding Rs 2 crore or the amount of investment made/proposed to be made in the startup, whichever is higher, as on the last date of the financial year preceding the year of investment/proposed investment," they added. Section 56(2) of the Income Tax Act provides that the amount raised in excess of a startup's fair market value is taxed at 30 per cent as income of the firm from other sources. Prabhu had taken up the issue up with the finance ministry. Normally, about 300-400 startups get angel funding every year. The government launched the Startup India initiative in January 2016 to build a strong ecosystem for nurturing innovation and entrepreneurship.