Startups get much-awaited tax exemptions from CBDT on investments above fair market rate

In a major incentive, startups can now issue shares to investors at higher than fair value without worrying about tax consequences. The Central Board of Direct Taxes (CBDT) has notified the much-awaited tax exemption on investments above fair market rate for startups.

The exemption provided to startups from the rigour of Section 56(2)(viib) of Income Tax Act has been long awaited, Amit Maheshwari, Partner Ashok Maheshwary and Associates LLP, said.

The effect of the CBDTs notification is that in case a startup gets investment from resident angel investors, family offices or funds that were not registered as venture capital funds, it will not be taxed even if the investment is made in excess to the fair value.

It has been a long-standing industry demand to abolish this Angel tax, Ashok added.

A startup is a company in which the public are not substantially interested and conforms to certain conditions as prescribed by the Department of Industrial Policy and Promotion (DIPP) in February this year. Under Indian tax law, if an Indian company receives share subscription amount from an Indian resident which exceeds the fair value of shares, then the excess amount is taxed as income of the Indian company, said Rajesh H Gandhi, Partner, Deloitte Haskins and Sells LLP.

This is a welcome relaxation and would ensure that startups can issue shares to investors at higher than fair value without worrying about any tax consequences, Rajesh said.

A similar exemption already exists for Venture Capital Funds (VCFs). Ashok said this Angel tax still poses threat to earlier investments, which could be perceived as being overvalued in light of the declining valuations globally and in India. Last week, the DIPP has launched a portal and mobile app for startups to gather the latest updates on various notifications, circulars issued by various departments and different funding agencies.

Also read : Startups with slashed valuation may now need to pay tax on “extra” consideration

In January, Prime Minister Narendra Modi had unveiled a slew of incentives to boost startup businesses, offering them a tax holiday and inspector raj-free regime for three years, capital gains tax exemption and Rs 10,000-crore corpus to fund them.