In a major boost to the angel funding for Indian startups, the Central Board of Direct Taxes has exempted 702 startups under Section 56 (2) (vii) of Income Tax Act, 1961. The minister of commerce and industry Piyush Goyal informed the parliament that these startups had been exempted till June 21.
He said that, as of June 21, Department for Promotion of Industry and Internal Trade (DPIIT) had received 944 applications for angel tax exemption. Of this:
- 39 have been found to be incomplete
- 203 applications were repeat or modified applications
- CBDT has exempted 702 startups under this provision
The development comes in lieu of the notice issued by DPIIT on February 19, 2019. The notice said: “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.”
It is to be noted that prior to this update, section 56 (2) (vii)(b) of the Income Tax Act said that if a privately held company issues its shares at a price more than its fair market value, the amount received in excess of the fair market value will be taxed as income from other sources.
Due to this provision, 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.
At the time, 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.
After much protests and discussions, the CBDT and DPIIT had issued the February notification. At the time of notification, it was also widely discussed that a few pain points for startups remain the same: Section 68 was yet to be addressed and the certification process for the tax exemption under Section 80-IAC had been left unaddressed.