Prabhu Clears Proposal, Sets New Definition Of Startups, Turnover, Investments


Good news is on the way for startups as Suresh Prabhu, Industry, Civil Aviation and Commerce Minister, cleared a significant proposal regarding angel tax for the encouragement of investments.

Startup tax easement

The clarification of this proposal will also simplify the exemption process under Section 56 (2) of the Income Tax Act. From now on, a startup will be an entity for a period of ten years from the registration or incorporation date. Earlier it was 7 years.

Prabhu tweeted, “Delighted to inform you that a Gazette Notification will be issued today simplifying the process for startups to get exemptions on investments under section 56(2)(viib) of Income Tax Act, 1961. #Startup #AngelTax @DIPPGOI.”

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In the same note, it will continue to its recognition as a startup unless it has crossed the limit of INR 100 Crore in any of the aforementioned years. Previously, this limit was fixed up to INR 25 Crore.

Prabhu tweeted “Delighted to inform you that a Gazette Notification will be issued today simplifying the process for startups to get exemptions on investments under section 56(2)(VIIB) of Income Tax Act, 1961.”

Startup taxation ease

Once the Department of Promotion of Industry and Internal Trade (DPIIT) issues the notification, it will be amended.

Ramesh Abhishek, Secretary, DPIIT, said that the department is currently working on the proposal to prepare a simplified and cohesive platform for the startups and angel investments.

In fact, the investment from NRIs and Alternate Investment Funds-Category I (SEBI registered) will enjoy freedom from liabilities under Section 56(2)(VIIB) of Income Tax Act when the limit crosses INR 25 Crore.

Apart from the information mentioned above in the new notification, the following are the transformations the startups and angel investments will enjoy.

  • In order to become an eligible entity as per Section 56(2)(VIIB), A startup should not invest in any immovable asset, transport vehicles priced INR 10 Lakh or above, advances or loans, and capital contributions to any other entity or asset unless it is necessary for the business.
  • The eligibility for exemption will be only entertained under this section if the startup is a DPIIT-recognized private limited company and has not invested in any of the specified assets.
  • The startups will have to file a signed self-declaration with DPIIT to avail the exemption under Section 56(2)(VIIB). This declaration will be transmitted by DPIIT to CBDT.
  • An application might not be required to avail the exemption benefits.
  • Case-to-case examination of exemption for startups might not be mandatory.
  • The share value may not be considered as a mandatory criterion for the new exemption of the investments under Section 56(2)(VIIB).

After the proposal placed by the startups countrywide, the officials of DPIIT and CBDT sat together on a roundtable meeting with the concerned entities and organizations related to startups and formed a working group. This comprises of the members from LocalCircles, iSPIRT, Indian Angel Network, and the Indian Private Equity & Venture Capital Association (IVCA).

The Working Group confirmed the acceptance of the demands raised to the DPIIT officials. A notification will be published very soon based on the progress.

Sachin Taparia, Founder, LocalCircles, said, “This eliminates a major obstacle for Indian startups and if implemented right, could give a significant boost to the Indian startup ecosystem as individuals with tax paid income, as well as, corporates will be able to easily participate in startup investments.”

Sanket Aggarwal, Founder, GlobalKart, said, “Widening the definition of startups to include later stage companies with a higher annual turnover and increasing exemption limit on equity investments will give the much needed boost to mid-sized startups which are raising $2-3 Mn, a deal size which covers the largest slice of the startup investment by volume. The additional relief to alternative investment funds and NRIs beyond the limit of INR 25 Cr under section 56(2)(VIIB) of IT Act will encourage inflows into the Indian startup ecosystem.”

The startups will now be eligible for considerations due to the shares issued or to be issued if it stays within the exempted limit of INR 25 Crore. The consideration from a startup with a net worth of INR 100 Crore or a turnover of INR 250 Crore will be exempted too.

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Despite the reforms, many of the angel investors and startups depict that this is the half of what they demanded. They suggested that the government should consider Section 68 once more. The proposal does not mention any reform in Section 68.