[YS Exclusive] Government circular is all set to tame Angel Tax norms this week

According to YourStory sources, the government is likely to issue a circular this week, which will address most of the concerns that startups have with regard to the Angel Tax.

Startups may finally get a breather from the much-hated Angel Tax this week. The DIPP, now renamed as the Department for Promotion of Industry and Internal Trade (DPIIT) is likely to issue a circular this week that provides a blanket exemption to startups that are up to 10 years old from Angel Tax notices.

Sources close to the matter confirmed to YourStory that the DPIIT has taken into account the representations made by angel and other investors, fund managers, entrepreneurs and the Central Board of Direct Taxes, and decided to ease the existing provisions in a big way.

According to the source, who attended the meeting held by the DIPP with ecosystem stakeholders on February 4, here are some of the broad measures that one can expect in a circular likely to be issued by the DPIIT and CBDT.

  • The new norms are likely to increase the age of startups who can file for exemption from Angel Tax from 7 years to 10 years, which means a larger pool of companies will qualify for startup status.
  • The revenue threshold for a company to be considered as a startup is also reportedly being increased from Rs 25 crore to Rs 50 crore, which will also expand the pool of companies considered to be startups and qualify for the various exemptions and benefits available. However, these norms will not apply to an entity that is a result of a spin-off from another existing entity.
  • Startups can raise additional money from shareholders as deposits.
  • Startups can issue ESOPs to directors, promoters.
  • Norms for startups to issue sweat equity to executives are going to be made easy.
  • While filing tax returns, startups need no longer file their cash flow statements. Only the balance sheet and profit and loss (P&L) statements need to be filed.
  • Entry of FDI in to a company will be made easier, also External Commercial Borrowings will be available to startups to raise.
  • The new norms are also set to grant a blanket exemption on taxation for funding of up to Rs 25 crore raised from any source. There are caveats, however: one is that startups need to file a simple self-declaration saying that they will not invest any of this funding into assets like gold, real estate and securities of other companies. However, they can invest in some assets if it is part of their current line of business. For instance, a hospitality chain can purchase real estate as it falls within its business operations.
  • Startups will also be able to do treasury management, much like larger corporates do to manage their money (for instance, invest these in money-market mutual funds). Startups will also be allowed to create wholly-owned subsidiaries and fund them if they are focused in selling tech globally and create fully-owned subsidiaries.

From an investability perspective too, the DPIIT is reportedly making startups an attractive proposition. Listed, actively traded companies with a turnover of Rs 100 crore (or a net worth over Rs 100 crore on a consolidated basis) can invest in startups, and this investment would be exempt from taxes just the way a SEBI-registered VC fund is, under Section 56 2(viib). This expands the pool of potential investors, and also makes it more attractive corporate India to invest in startups and open up a new line of funding for the country’s startup ecosystem.

At the same time, the DIPP is also changing the definition of accredited investor - angel funds under SEBI AIF, Rs 2 crore above should be the net worth, these angels will be exempt from section 56 2(viib).

The highly placed source also told YourStory that once this circular is out, startups who have received notices can cite the circular, sign the self-declaration and submit it to the appellate authority, taking recourse under new circular. That way, no tax authority can harass the startup under this recourse.

Also read: Yes, the DIPP has provided a breather on angel tax assessments, but major changes are still pending

What's left to be done

That leaves Section 68, which puts the onus on a startup to provide investor information such as bank statements, financial statements, and tax returns. The DPIIT is believed to be considering a way out of this which would remove the burden of proof from entrepreneurs and have the tax authorities follow up with the investors in question.

Angel Tax took shape in 2012 when the Manmohan Singh-led UPA government went after shell companies of political money, all of which were launched to launder money. However, the provisions have also been used to ask startups to pay taxes on their Share Premium under Section 56 2(viib) and explain cash credits under Section 68 of the Income Tax Act of 1961.

Nicknamed Angel Tax, it became what many described as a “lightning rod” to curtail entrepreneurship.

According to a survey Local Circles and the Indian Venture Capital Association, close to 2,000 startups have received Angel Tax notices from the Income-Tax Department over the past three years. Following intense lobbying from the startup ecosystem, the Government of India is finally looking at a near-blanket exemption to the Angel Tax. We look forward to measures that will protect the fledgling startup ecosystem and innovation in the country.