In what could be a sign of relief for startups affected by the issue of Angel Tax, the Minister for Commerce and Industry, Suresh Prabhu has cleared a proposal to simplify the process of exemptions for startups under Section 56 (2)(viib) of the Income Tax Act.
As per a notification from the Department for Promotion of Industry and Internal Trade (DPIIT), the definition of a startup has now been enhanced. A company will now be considered a startup up to a period of 10 years from the date of its incorporation or registration. Earlier, the duration was seven years.
In terms of financials, an entity will continue to be recognised as a startup if its turnover for any of the financial years since incorporation has not exceeded Rs 100 crore. This limit was Rs 25 crore earlier.
Addressing the Angel Tax issue, the notification states that a startup can be exempted under Section 56 (2)(viib) of the Income Tax Act if it is a privately held company, if the amount is up to Rs 25 crore and is recognised by DPIIT.
In addition, if an eligible startup receives funding from a listed company that has a net worth of Rs 100 crore or a turnover of at least Rs 250 crore, this will also be exempted from Angel Tax. However, this will not apply if the founders are non-residents of the country. It will also not apply to category 1 of Aternative Investment Funds registered with SEBI.
A startup will also be exempt if it is not investing in a building or land being used for any purpose other than that of the startup or is held by it as a stock-in-trade in the ordinary course of business. The notification states that the startup should not be investing that amount in any loans and advances apart from those extended in the ordinary course of business where the lending is a substantial part of the business.
The notification also prohibits the startup from using that amount to make capital contribution to another entity, to invest in shares and securities and from buying a vehicle, aircraft, yatch or any mode of transport that exceeds Rs 10 lakh. It also prohibits the startup from investing the funds raised in jewellery other than that held by the startup as stock-in-trade and any other asset that is of the nature specified in sub clauses (iv) to (ix) of clause (d) of Explanation to clause (vii) of sub section (2) of section 56 of the Act.
Startups will be required to sign a declaration with DPIIT to avail the exemption, which will then be transferred from DPIIT to the Central Board of Direct Taxes (CBDT).