Over 10.8K DPIIT-recognised startups have applied for the angel tax exemption so far
A total of 8,066 startups have been exempted from angel tax till September 26, 2023
To qualify for the angel tax exemption, startups are required to submit Form 2 for Section 56(2)(viib) affirming they aren't investing in assets like land, buildings, vehicles costing more than INR 10 lakh, or other specific assets, unless utilised for specific business-related activities
Since the 2019 notice announcing angel tax exemption for startups, 8,066 DPIIT-recognised startups have been granted exemption from angel tax, said the DPIIT in response to an RTI filed by Inc42.
It is worth noting that the DPIIT and CBDT issued a notification on February 19, 2019, saying, “All the startups are allowed to receive angel tax exemption regardless of their share premium values given that the aggregate amount of paid-up share capital and share premium of the startup after issue or proposed issue of shares, if any, does not exceed INR 25 Cr.”
However, for eligibility, startups are required to submit Form 2 as per DPIIT vide Notification No. G.S.R. 127 (E), affirming they weren’t investing in assets like land, buildings, vehicles costing more than INR 10 lakh, or other specific assets, unless utilised for specific business-related activities.
Remarkably, most startups remained silent on this front. As of June 21, 2019, only 944 startups had applied for angel tax exemption, out of which the CBDT exempted 702 startups under this provision.
And, as of February 2021, a mere 8% (equivalent to 3,612 startups) of the recognised 44,000 startups had submitted Form 2 to avail angel tax exemptions.
The RTI response by DPIIT revealed that between February 19, 2019, and September 26, 2023, 10,809 DPIIT-recognised startups applied for the exemption, yet only 8,066 have been green granted exemption.
Currently, according to the Startup India website, India has over 99,380 DPIIT-recognised startups. Thus, the number of angel tax-exempted startups remains stagnant at 8%.
3one4 Capital’s partner, Siddarth Pai, previously told Inc42 that adhering to the guidelines of Form 2 could hamper startups. He highlighted issues, such as restrictions on loans & advances, shares & securities, and capital contributions, which could hinder activities like M&As or the creation of subsidiaries. Pai emphasised the risk, stating a violation could lead to hefty fines, nearly consuming 85-90% of a startup’s capital.
“That’s how tightly they did. And in case you violated, you pay the tax when you represent and pay a fine that is two times your tax, along with interest & penalties. You would end up losing close to 85 to 90% of your money. Who will take that risk?” Pai added.
In its notification on September 26, 2023, the Income Tax department has made changes to Rule 11 UA, introducing diverse valuation methods to offer startups and investors more clarity and adaptability. However, while the notification tackled certain concerns, it didn’t address the primary issue of disputes stemming from projected vs. actual valuations.