Limits notified for tax breaks to angel investors

The notification says start-ups may avail of the tax concession only if total investment, including funding from angel investors does not exceed Rs 100 mn

The government announced it had exempted investments by individuals in some categories of start-ups from the so-called ‘angel tax’.

The notification says start-ups may avail of the tax concession only if total investment, including funding from angel investors (those who make the initial equity investment) does not exceed Rs 100 million.

The said tax, under Section 56(2)(viib) of the Income Tax Act, provides that where a closely held company issues its shares at a price more than its fair market value, the amount it gets in excess of this value will be charged to tax as income from other sources, to the tune of 30 per cent. 

Concerns were expressed over the possibility of investment into the start-up system being discouraged by this; also, of harassment by tax officials.

“Genuine angel investors should not be taxed. This notification, as well as the follow-up notification from the department of revenue,  will provide the mechanism for this to happen,” said Ramesh Abhishek, secretary, department of industrial policy and promotion (DIPP). “We have been told 300-400 start-ups normally get angel funding in a year.” His department oversees the regulatory framework for start-ups. 

However, after the latest notification, only angel investors with average return income of Rs 2.5 million for the past three years or a net worth of Rs 20 million are eligible for 100 per cent tax exemption on investment into start-ups above the fair market value.

Also, only investors who have funded start-ups that have been certified by the government’s inter-ministerial board (IMB) will be eligible, the official added. In other words, the majority of such investment gets no relief.

IMB recognises start-ups for the purpose of providing tax benefits. However, those incorporated before April 1, 2016, are not eligible for such breaks and will, therefore, also not be eligible for exemption from the angel tax. Only 88 start-ups have been extended tax benefits till date, of 8,765 ventures that had applied for it since January 2016.

“The positive is that the govt is working to help address the  issue. The need of the hour is to make it less, not more, onerous and bureaucratic. Else, we could stifle a growing start-up eco-system,” said Padmaja Ruparel, president, Indian Angel Network.

Start-ups will continue to enjoy income tax benefits for three out of a block of seven consecutive assessment years. In the case of start-ups in the biotechnology sector (including medical devices), the period shall be up to 10 years from the date of incorporation or registration, up from the earlier five  years. Abhishek said the government was not looking to further change the definition of a start-up.

IMB itself has now been given specific legal sanctity. It will have eight members from various government departments, under the convenorship of the additional secretary, DIPP. Also, representatives from the ministries of corporate affairs, electronics and information technology, department of science and technology and the Central Board of Direct Taxes, among others. 

It will also operate under specific time-based guidelines to certify start-ups, Abhishek said. The IMB was set up in 2016, to provide an impetus to start-ups.