So Close, Yet So Far: Angel Tax Notification Fails To Address Vital Issues

After a months-long fight, Indian startups have something to celebrate today. What started as a tweet by a disgruntled Bengaluru-based entrepreneur on 17th December 2018 snowballed into a Twitter campaign which echoed across the corridors of power loud enough for ministers to sit up and take notice. Today, after much back and forth between the startup community, tax authorities and government officials, angel tax rules have been relaxed for all startups in a gazette notification issued by Department of Promotion for Industry and Internal Trade (DPIIT).

Quashing an April 11, 2018 notification, the new notification issued today has taken a series of measures not only to safeguard startups from the Section 56(2)(viib) of the Income Tax Act (I-T Act) but has also tweaked the formal definition of startups to include more companies in its purview.

According to the new notification:

1. The startups will continue to be considered as startups till a period of 10 years since their incorporation. Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded INR 100 Cr.
2. All the startups are liable 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 share, if any, does not exceed, INR 25 Cr.

The notification, thus, almost erases the concept of angel tax for startups. Credit for this must be given to the effort made by the team of DPIIT under the leadership of union minister for commerce and industry Suresh Prabhu, the Central Board of Direct Taxes (CBDT) team and most importantly the startup ecosystem stakeholders — iSPIRT Foundation, IVCA, Indian Angel Network, LocalCircles and entrepreneurs who fought for the exemption.

However, the battle still is half won. There are issues that the notification has failed to address, including:

• Startups who received assessment orders will still have to fight the battle, old way
• Section 68 is yet to be addressed
• The certification process for the tax exemption under Section 80-IAC has been left unaddressed

S Vasudevan, partner, Lakshmikumaran & Sridharan Attorneys said, “The stated exemptions may provide much-needed relief to the relatively larger sized startups (having turnover upto INR 100 Cr. instead of earlier threshold INR 25 Cr.) who may have been required to pay tax on premiums received on share subscription.”

However, “Many of these reliefs will require amendments in the Income-Tax Act, 1961 and the startups may have to wait till that time to avail these benefits. It is to be noted that no relief is proposed in respect of section 68 of the Income-tax Act, 1961. So the startups will continue to carry the onus to establish the genuineness of the source of the investment made by the investors failing which the sums received on share application can be taxed by the department,” he added.

The Notification Does Not Address The Startups Who Have Received Assessment Orders

Speaking to Inc42, Siddarth Pai, founding partner of 3one4 Capital said, “The one single point that undoes the entire notification is point 6 which says that the startups having already received assessment orders won’t benefit from this notification.”

Seconding Pai’s view, Sreejith Moolayil, cofounder and COO at True Elements said, “It neither addresses our concerns nor the issues pertaining to Section 68 of I-T Act.”

Pai, however, added that this will be addressed through appeal though.

Pai’s view was vindicated during today’s press conference, jointly addressed by the CBDT and the DPIIT. As convenor of Task Force, CBDT member Akhilesh Ranjan, stated that as per the law, the issues could only be addressed through appeal. And, “We will ensure that no further recovery pertaining to these orders takes place and fast disposal of such cases falling under Section 56(2)(viib) of the I-T Act.”

Sachin Taparia, founder of LocalCircles said, “We will also make a submission to CBDT soon and request them to drive fast track disposal for startups having cases under appeal with exemption to be considered and any possible consideration for orders under section 68 where pan numbers of investors have been furnished to be included in CBDT’s instructions to assessing officers.”

Will It Be Easier For Startups To Get A Tax Break?

One of the pain points for startups has been availing tax exemptions. Income tax breaks are available to these companies under Section 80-IAC — which makes DPIIT recognised startups eligible for exemption. As of July 2018, of the 11,422 DIPP recognised startups, only 2,197 had applied for the exemption, and just 88 were granted exemption by DIPP.

Another major change brought about by today’s notification is the downsizing of the committee which decides if a startup should get tax relief.

Earlier what was an eight-member inter-ministerial board (IMB) has now been reduced to three. The Inter-Ministerial Board of Certification now comprises of the following members:

(i) Joint Secretary, Department of Promotion of Industry and Internal Trade, Convener

(ii) Representative of Department of Biotechnology, Member

(iii) Representative of Department of Science & Technology, Member

However, the process of exemption remains the same. Many of the startups in their earlier conversations with Inc42 had objected the IMB process and called ‘subject to innovation’ as a meaningless and vague clause. Owing to the nature of technology growth the meaning of innovation changes with time. For instance, while one particular startup solution may be termed as innovative in its first year, it may not be considered the same, later on.

The notification also failed to address the Section 68 — which deals with unexplained cash credits and has implications on the fundraise has also been left unaddressed.

However, reforms like these are a continuous process and startups will have to new battles to fight tomorrow. For today a major roadblock has been removed.

Let’s take a look at the growing wings of angel taxation and its clipping by the DIPP in recent months —angel tax timeline!