ANGEL TAX FOR STARTUPS

Ever since the govt of India launched the Startup India program, there has been a fantastic surge within the number of startups arising.

The Startup India campaign was launched in 2016 so as to extend entrepreneurship and build a robust and inclusive ecosystem for innovation in India. Through this campaign, various aspects of running a startup, like bank financing, tax exemptions, simplifying the method of registering the business and other benefits were targeted, so as to form running a business more appealing to India’s youth.

In this article, we’ll discuss the Eligibility & various tax exemptions that are applicable for the startups in India. Let’s attempt to summarise the article by watching various provision of tax Act, 1961

Eligibility Criteria for Startup Recognition:

1. The Startup should be incorporated as a personal Ltd. or registered as a partnership firm or an indebtedness partnership
2. An entity shall be considered as a startup up to 10 years from the date of its incorporation
3. Turnover should be but INR 100 Crores in any of the previous financial years
4. the corporate remains a startup if the turnover per annum doesn’t cross the Rs 100 crore mark in any of the ten years. Once the corporate cross the mark, it not remains eligible to be called a startup. The mark of Rs 100 crore to have been improved by the Indian government within the recent past from Rs 25 crore
5. The firm should have approval from the Department of commercial Policy and Promotion (DIPP)
6. The Startup should be working towards innovation/ improvement of existing products, services, and processes and will have the potential to get employment/ create wealth.
7. An entity formed by splitting up or reconstruction of an existing business shall not be considered a “Startup”

BENEFITS

Exemption from levy of angel tax under section 56(2)(viib)

Deductions under section 80-IAC of the tax Act,

The liberalized regime of section 79 to hold forward and set off the losses

Exemption under section 54GB to the shareholder for creating investment during a startup

Access to the dedicated cell created by the CBDT to deal with the issues of startups

Tax Exemption under Section 80 IAC of the tax Act, 1961 for Startup

What is an Angel Investment?

Angel investment is considered a sort of initial funding done by the Angel investor to assist startups to build their business. Not all the businesses have ample funds to start out their work trip, and that’s where Angel investor comes into the image. Their role is providing much-needed funds to startups that are battling procuring adequate capital to kick starter their business operation. Such an investor examines the feasibility of the business idea of various startups then starts investing accordingly. Such investments are made against the equity or convertible debt, the return of ownership of the startups.

What is an Angel Tax for Startups?

Angel Tax for Startups is usually mentioned because the tax payable on investment procured by the unlisted companies through the issuance of shares where the share price is seen in more than FMV (Fair Market Value) of the shares sold. the surplus realization is taken into account as income & taxed accordingly. Investment from overseas investors & speculator funds doesn’t come under the regime of this tax structure.

What is the elemental Issue with Angel Tax for Startups?

The primary issue with this tax is that it’s levied only the investment comes from the local investors. This acts as a serious deterrent to investors who have an interest in investing extra money for the sake of an upper return. Besides, the upper taxable rate makes this tax structure unfavorable for the expansion of startups.

Rate of Interest under Angel Tax for Startups

This particular rate becomes a headache for investors and therefore the receiver as they lose 1/3 of the investment in taxes.

A few reasons why startups aren’t in favor of angel tax are as follows:-

The process that firms use for the calculation of their market price varies tons from the Government’s method. the govt often puts various essential factors out of the equation while calculating the company’s market price, which eventually results in substantial price variations. This further forced the concerned parties to pay higher taxes than usual.

Under Angel tax, the startups find themselves contributing a big part of their investment towards taxes. Furthermore, it also ends up being disruptive to the industry’s growth. The stringent rate under this tax structure discourages investors from disbursing big funds to small firms. Angel tax has hampered the event of the startups, leaving the enthusiastic business owners dispirited.

After getting feedback from the investment community, India’s Government[1] has finally made some relevant amendments to the laws to form the tax structure less stringent to entrepreneurs and investors.

What Amendments did the Indian Government make to Angel Tax for Startups?

Following are the changes made by the Indian Government to regulate this chaotic situation:

The entity will still function startup if it doesn’t reap a turnover of quite 100 crores in any fiscal year . Previously the turnover limit was set at Rs 25 crore. this permits startups to thrive even more.

The IT Department issues a notice regarding the waiver of angle tax for the startups, provided they satisfied the precise conditions.

What are the Conditions to urge Exempt from Angel Tax?

Following are the conditions that the startups should meet to avail exemption regarding the angel tax:

The paid-up capital & the firm’s share premium must not surpass the max- limit of Rs 10 crore after the issuance of the shares.

The startup must seek assistance from certified merchant bankers for the calculation of the market price.

The mini. net worth of the investor shouldn’t be but Rs 2 crore. Furthermore, the investor’s income in each of the preceding three years shouldn’t be fewer than Rs 50-lakh. If an individual ensures conformity with such requirements, then only he/she qualifies as an angel investor.