All Hail Startups! Govt Liberalises Conditions For Angel Tax Exemption

After months of back and forth over letters, Twitter campaigns and meetings, the government has now notified changes in the rules for angel tax exemption for the startups.

In a gazette notification on Wednesday (January 16, 2018), the Department of Industrial Policy and Promotion (DIPP) has now provided for a simpler mechanism for startups to claim exemption from angel tax retrospectively.

This exemption mechanism is applicable for all the DIPP-recognised startups whose aggregate amount of paid-up share capital and share premium after the proposed issue of share does not exceed INR 10 Cr ($1.4 Mn).

Additionally, the approval mechanism will also be applicable for the startups incorporated before April 2016, which was initially the starting date set for the 3-year tax exemption window policy under the Startup India policy.

The Gazette notification has made certain partial modifications in the angel tax notification issued on April 11, 2018.

The New Rules

Under the new rules, a startup can seek angel tax exemption by applying to DIPP with all the necessary documents. The application of DIPP-recognised startups will be moved to the Central Board of Direct Taxes (CBDT) with necessary documents.

The gazette notification says, “CBDT has been mandated to grant exemption approval to the startup for the purposes of this clause or they can decline to grant such approval within a period of 45 days from the date of receipt of application from the DIPP.”

Henceforth, the earlier rules of inter-ministerial board certification for approval and the report of a merchant banker specifying the fair market value of shares have been removed. The application only seeks justification for the valuation of shares along with supporting documentation, if any.

Other changes include:

• A startup will have to provide account details and return of income for last three years
• Startups, whose aggregate amount of paid-up share capital and share premium do not exceed INR 10 Cr after the proposed issue of shares, are eligible for angel tax exemption
• Angel investors will have to share details of their net worth and return of income
• An investor should have a returned income of INR 50 Lakh ($70K) or more for the financial year preceding the year of investment
• An investor should have a net worth exceeding INR 2 Cr ($280K) or the amount of investment made/proposed to be made in the startup, whichever is higher, as on the last date of the financial year preceding the year of investment/proposed investment.

The rules also noted that in case the approval is requested for shares already issued by the startup, no application shall be made if the assessment order has been passed by assessing officer for the relevant financial year. There is a relief for cases that are under process but where assessment order has not yet been passed.

In a Tweet, Gopal Srinivasan, Chairman, TVS Capital Funds said, “A new benchmark is set in ease of doing business while solving the #angeltax issue by @DIPPGOI  and our champion @rabhishek1982  No committee, no certificate of valuation needed, all previous and future investments covered, startups incorporated before April 2016 also covered.”

The Fight For Freedom From Angel Tax

In November 2018, the Ministry of Consumer Affairs (MCA) issued notices to more than 2,000 startups that had raised money since 2013. The notices were mostly sent to the startups whose valuations had fallen after the first round of fundraising.

Later in a tweet, it was clarified that certain GNL-2 forms filed with private placement offer letters were marked for resubmission with a query to justify high share premiums.

To express their discontent, startup founders and investors took to Twitter. On December 17 Goodbox CEO Abey Zachariah, tweeted: “Startup founders in Bangalore who are getting notices for angel tax, please DM me. A friend may have to shut down his company as he got an angel tax notice. Angel tax is startup killer.”

The tweet was picked up by startup evangelist and founder of Aarin Capital, TV Mohandas Pai, who called angel tax “draconian.” With this, the protest against angel tax notices spread like a forest fire with Anand Mahindra, Biocon CEO Kiran Mazumdar Shaw, Snapdeal founder Kunal Bahl, entrepreneur, investor Rajesh Sawhney and others tweeting in support of abolition of angel tax.

After a social media storm, Union Minister of Commerce & Industry and Civil Aviation Suresh Prabhu said that they have taken up the issue.

Also, numerous startups and organisations including NASSCOM, the Indian Private Equity and Venture Capital Association (IVCA), the Indian Angel Network, software product think tank iSPIRT Foundation and community social media platform  LocalCircles have written multiple letters to the Department of Industrial Policy and Promotion (DIPP) and the Central Board of Direct Taxes (CBDT) demanding angel tax exemption.

Recently, 70 startups and iSPIRT foundation reached out to the Prime Minister saying that startups require significant capital early on and that raising equity funding via angel investors is the only option for them, which can only be raised at a premium for various reasons.

With this update in the angel tax rules for startups, entrepreneurs have won a long and hard fight for independence from angel tax. Going ahead, will the ease in angel tax exemption rules be able to serve the required purpose, is certainly a mystery that only time can resolve.