New startups meeting government norms to escape angel tax

MUMBAI: New business entities, which meet the government-prescribed definition of `startups', will no longer have to suffer the burden of `angel tax'. This will enable them to obtain investments from unregistered venture capital funds or high net worth individuals, without having to pay tax (referred to as angel tax) on the differential, if the investments made exceed the fair market value of the entity .

A notification from the Central Board of Direct Taxes (CBDT) in this regard, interestingly, came to light by a late night tweet on Friday by `@StartupIndia', a government initiative to boost entrepreneurship. It prompted NITI Aayog CEO Amitabh Kant to respond enthusiastically.
However, this notification is not all-encompassing and will cover only new entities (which have not yet completed five years) and which meet the prescribed conditions. Girish Vanvari, tax leader at KPMG (India), says, “The sword hanging on startups to justify valuation will not be there any more.“ However, he points out, “It is interesting to note that this concession, under the newly issued CBDT notification, is available only to startups as defined under the government policy .“ Startups are defined by a department of industrial policy and promotion (DIPP) notification dated February 17, 2016, to mean “an entity, incorporated or registered in India not prior to five years, with annual turnover not exceeding Rs 25 crore in any preceding financial year“.

Second, the activities necessary to qualify as a startup are also defined: “The entity should be working towards development, deployment or commercialization of new products, processes or services driven by technology or intellectual property .“

Safeguards are in place to ensure that existing companies do not showcase themselves as new startups. An application is to be made for recognition as a startup with the DIPP and if tax benefits are to be claimed, then validation by an inter-ministerial board is required.

Recently , many ex-corporate honchos, especially from the IT sector, invested in their individual capacity in various sectors. If these investee compani es meet the startup definition criteria, they will escape from the ambit of angel tax. But, as an angel investor points out, “An entity ceases to be a startup after the initial five years. Thus, my investments after this period could expose the investee company to angel tax.“

Gautam Nayak, tax partner, CNK & Associates, adds, “While the existing provision of angel tax not being levied when funds are received from Sebi-registered venture funds or venture companies will apply even to existing entities, it is clear the new notification will not cover them as they will not be certified by the relevant certification authority .“