New definition to give start-ups a bigger angel tax breather

The government may further exempt start-ups and investors from paying angel tax by tweaking the definition of a start-up soon.

With pressure from industry mounting, a working committee will be created in four to five days, officials said.

On Monday, Department for Promotion of Industry and Internal Trade (DPIIT) Secretary Ramesh Abhishek and officials from the Central Board of Direct Taxes (CBDT) met start-ups and investors to discuss ways to exempt small start-ups and investors from the angel tax. Last month, the government had eased norms for firms seeking an exemption.

A possible change in the definition of a start-up and dilution of norms applying to start-ups under Section 56 (2) (viib) of the Income-Tax Act was suggested by industry, a senior DPIIT official present during the meeting said. The Section deals with valuations (classification of a funding as income or investment).

The income tax payable on capital raised by unlisted companies through issuing shares where the share price is seen in excess of the fair market value of the shares sold has been dubbed angel tax. At present, an investor needs to have an average returned

income of ~50 lakh for the financial year preceding the date of tax filing.

A survey conducted by Indian Private Equity and Venture Capital Association (IVCA) — a lobby group representing investors — has shown that over 2,000 startups have received notices from the tax department.

The IVCA survey showed that 73 per cent of the 2,883 respondents received notices. The start-ups said they had received the notice for raising capital over the “fair market value” or for raising capital from unknown sources.

The government says no action will now be taken against those firms that have been served notices until the matter is resolved. “We have asked I-T department officers to not enforce actions unless the issue is clarified. We need to find parameters for start-ups and angel investors to allow tax exemption," said Akhilesh Ranjan, member of the CBDT. Start-ups want tax axed Facing sustained pressure from start-ups and venture capital funds over angel tax, the government has twice relaxed norms for exemptions from the controversial levy. In January, it scrapped the existing mechanism to approve start-ups applying for tax breaks under Section 56. While the tax has not been abolished outright, as many demanded, start-ups need not go through the interministerial board now. Instead, new applications will be directly evaluated by the CBDT. Firms will have to submit their applications through the DPITT, after which it will be forwarded to the CBDT. The CBDT has also been mandated to evaluate and respond within 45 days of receiving such applications, a tax official said.

Venture capital firms, however, complain that the new rules do little to help them since only start-ups approved by the DPIIT would be eligible. “Officials acknowledged that it has caused problems for startups, but also pointed out that the government’s idea is to prevent misuse. They said they were keen to address the issue and were open to re-looking several things to ensure startups do not face taxation under section 56 — including the definition of an eligible start-up, criteria for investors and so on," said Ashish Aggarwal, senior director and head of public policy at National Association of Software and Services Companies.

Also, the earlier requirement for start-ups to submit a report from a merchant banker specifying the fair market value of shares might be removed. Firms had complained this was very cumbersome. Angel investors need not share their income certificates with start-ups now.