Start-Up investors set to get relief from 'Angel Tax'

Start-Ups in India are set to get relief from the 'Angel Tax,' with the exemption limit being raised to Rs 50 lakh from Rs 25 lakh for returns on the income a year before an investment.

Union Commerce and Industry Minister Suresh Prabhu has approved a notification pertaining to Clause (VII-B) of Subsection (2) of Section 56 of the Income Tax Act to give relief to 'Angel investors' in the Start-Ups, according to highly placed sources.

'Angel Tax,' a UPA era law, is a tax imposed on the difference between the premium value of shares and fair market value of shares.

The ambiguity lies in the valuation of these premium shares, wherein, the tax man sees angel investor valuations higher than fair market values and hence issues show cause notices to these start-ups.

The Central government's decision came after a number of representations were made to Commerce and Industry Minister Prabhu by the Start-Ups for relief from the often ambiguous 'Angel Tax' demands, sources said, adding that the step is expected to give a boost to the growing sector of Start-Ups.

According to the new decision, the earlier procedure of applying to the Inter-Ministerial Board of Certification for approval under Clause (VII-B) of Section 56(2) of Act has been done away with.

Now application procedure has been simplified by making application to the Central Board of Direct Taxes (CBDT) through the Department of Industrial Policy and Promotion (DIPP) portal in Form 2 online.

The earlier requirement of Start-Ups to submit a report from the merchant banker, which deals in commercial loans and investment, specifying the fair market value of shares has been removed, sources said, adding that this was found to be very cumbersome by the Start-Ups.

"Angel investors need not share their income certificates with Start-Ups now and they can directly upload to the system," sources said.

According to the new notification, a Start-Up, which is recognised by the Department of Industrial Policy and Promotion (DIPP), shall be eligible to apply for approval of exemption if the following conditions are fulfilled:

A) The aggregate amount of paid-up share capital and share premium of the Start-Up after the proposed issue of a share, if any, does not exceed Rs 10 crore.

B) The investor/proposed investor shall have--1) Returned income of Rs 50 lakh or more for the financial year preceding the year of investment/proposed investment, and 2) Net worth exceeding Rs 2 crore or the amount of investment made/ proposed to be made in the Start-Up, whichever is higher, as on the last date of the financial year preceding the year of investment/proposed investment.

The application of the recognised Start-Up shall be transmitted by the DIPP to the Central Board of Direct Taxes (CBDT), which has been given the final mandate to grant approval or rejection to the Start-Up within a period of 45 days for the purposes of angel tax exemption.