In a major relief to budding entrepreneurs, the government today allowed startups to avail full tax concession on investments up to Rs 10 crore from investors, including angel financiers.
The decision would address a key issue faced by angel investors who put money in startups during early growth stage, and would also provide level playing field for all investors.
The Commerce and Industry Ministry today came out with a notification saying a startup can apply for seeking tax concession under the section 56 of I-T act. The section 56 provides for taxation of funds received by an entity.
According to the notification, an angel investor 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 would be eligible for 100 per cent tax exemption on investments made into startups above fair market value.
"With the introduction of amendments through this notification, startups are likely to have an easy access to funding which in turn will ensure ease in starting of new businesses, promoting startup ecosystem, encouraging entrepreneurship, leading to more job creation," the ministry said in a statement.
Several startups had raised concerns over taxation of angel funds under Section 56 of the Income Tax Act, which provides for taxation of funds received by an entity. As many as 18 startups have got notices from tax authorities.
This section provides that where a closely held company issues its shares at a price more than its fair market value, the amount received in excess of the fair market value will be charged to tax the company as income from other sources.
Elaborating on the matter, Secretary in the Department of Industrial Policy and Promotion (DIPP) Ramesh Abhishek said the main objective is that risky and genuine investments by angel investors should not be taxed under Section 56.
"Earlier there were no provisions for angel investors. Now we have brought that clarity. For the purposes of Section 56, there is no restriction on class of investors and eligible startups can receive investment from any person against issue of shares," he told reporters here.
He clarified that a startup incorporated before April 2016 can seek exemptions from section 56 of the Income Tax Act.
However, the three year income tax concession would be available to only those that are incorporated after April 1, 2016 and before April 2021.
When asked about the reason for seeking some information regarding investors, he said these are basic details and any investor would have no problem in providing that.
Startups also enjoy income tax benefit for three out of seven consecutive assessment years under section 80-IAC of the Act.
"DIPP has issued gazette notification...constituting a broad based inter-ministerial board to consider applications of startups for claim of following incentives of the I-T Act 1961," it added.
The secretary said the board would dispose applications in a time bound manner and for that it will soon issue guidelines. The DIPP will allow in a weeks time to apply for these concessions.
The ministry said these amendments are introduced to address key demands of startups with regard to exemptions under the I-T Act.
Startups in the recent past have flagged their grievances to the government regarding angel tax provision, which they considered was not friendly to them.
An angel investor is the one who put funds in a startup when it is taking baby steps to establish itself in the competitive market.
Normally about 300-400 startups get angel funding in an year. Their investment in a unit ranges between Rs 15 lakh to Rs 4 crore.
The government has so far extended tax benefits to just 88 startups out of 8,765 that have been recognised by DIPP since January 2016.
The government launched the Startup India' initiative on January 16, 2016 to build a strong ecosystem for nurturing innovation and entrepreneurship.
"We are taking several efforts to foster the entrepreneurial ecosystem in the country. A broad based Inter-Ministerial Board has been set up to consider applications of startups for claim of following incentives of the Income Tax Act," he said in a tweet.
(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)