To provide a momentum to investments in start-ups, the Indian government has cleared a proposal that exempts a start-up from paying income tax on investment up to INR 250 million. However the Non Resident Indian (NRI) entities will not be entitled to the new exemption.
Expanding the scope of start-up in new scheme, an entity will continue to be recognised as a start-up if its turnover for any of the financial years since incorporation and registration has not exceeded INR 1 billion in place of INR 250 million earlier. Moreover, an entity will be considered as a start-up up to a period of 10 years from the date of incorporation and registration in place of the earlier duration of 7 years.
According to a gazette notification issued by the Department for Promotion of Industry and Internal Trade (DPIIT) of Ministry of Commerce & Industry, the process of exemptions for start-ups under Section 56 (2) (viib) of Income Tax Act have been simplified to encourage investments in start-ups.
In order to catalyse entrepreneurship by enabling angel investments to innovators across all sections of society and all sectors of economy, a gazette notification in partial modification of notification number G.S.R 364 (E) dated 11 April 2018 was issued on 16 February 2019. However, concerns were expressed regarding taxation of angel investments and there were issues that needed to be addressed to ensure availability of capital to start-ups.
Union Minister of Commerce & Industry and Civil Aviation Suresh Prabhu took up these issues with concerned officials and a roundtable was organized on 4 February 2019 under the chairmanship of Secretary DPIIT with start-ups, angel investors, and other stakeholders with a view to discuss the new measures undertaken by the department to address the Angel Tax issue and understand the mechanism to deal with it institutionally.
With this notification, a start-up will be eligible for exemption under Section 56 (2) (viib) of Income Tax Act, if it is a private limited company recognized by DPIIT and is not investing in any of the assets such as:
Building or land appurtenant thereto, being a residential house, other than that used by the start-up for the purposes of renting or held by it as stock-in-trade, in the ordinary course of business
Land or building, or both, not being a residential house, other than that occupied by the start-up for its business or used by it for purposes of renting or held by it as stock-in trade, in the ordinary course of business
Loans and advances, other than loans or advances extended in the ordinary course of business by the start-up where the lending of money is substantial part of its business
Capital contribution made to any other entity; shares and securities
A motor vehicle, aircraft, yacht or any other mode of transport, the actual cost of which exceeds ten lakh rupees, other than that held by the start-ups for the purpose of plying, hiring, leasing or as stock-in-trade, in the ordinary course of business
Jewellary other than that held by the start-up as stock-in-trade in the ordinary course of business
Any other asset, whether in the nature of capital asset or otherwise, of the nature specified in sub-clauses (iv) to (ix) of clause (d) of Explanation to clause (vii) of sub-section (2) of Section 56 of the Act.
Consideration received by eligible start-ups for shares issued or proposed to be issued shall be exempt up to an aggregate limit of INR 250 million.
In addition, consideration received by eligible Ssart-ups for shares issued or proposed to be issued to a listed company having a net worth of INR 1 billion or turnover of at least INR 2.5 billion will also be exempted.
The aggregate limit of INR 250 million will exclude consideration received by eligible Start-ups for the categories of persons who are:
Alternative Investment Funds- Category-I registered with Securities and Exchange Board of India (SEBI)
Listed company having a net worth of INR 1 billion or turnover of at least INR 2.5 billion provided that its shares are frequently traded as per SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
A start-up will file a duly signed declaration with DPIIT for availing exemption. The declaration will be transmitted by DPIIT to Central Board of Direct Taxation (CBDT).