The Department for Promotion of Industry and Internal Trade (DPIIT), on 19 February 2019, notified revised conditions to claim exemption from tax under section 56(2)(viib) of the Income-tax Act, 1961 (ITA).
Section 56(2)(viib) of the ITA levies a tax (angel tax) on share premium received by private companies for the issue of shares at a price higher than the fair market value of the shares, as computed for tax purposes.
As per the 19 February notification, the exemption from angel tax will be available to a startup: (a) which has been recognized by the DPIIT; (b) whose aggregate paid-up share capital and share premium after issue or proposed issue (excluding investment by non-residents, venture capital companies and venture capital funds, and specified companies) does not exceed ₹250 million (US$3.5 million); and (c) which has not invested in any specified assets (such as a building or land used for purposes other than its business or for renting or held as a stock in trade, loans and advances other than those extended in the ordinary course of business, capital contribution to any other entity, shares and securities etc.).
For the purposes of the notification, an entity shall be considered as a startup: (i) for up to a period of 10 years from its date of incorporation or registration, if it is incorporated as a private limited company or registered as a limited liability partnership in India; (ii) if its turnover for any of the financial years since incorporation or registration has not exceeded `1 billion; (iii) if it is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential for employment generation or wealth creation; and (iv) provided it was not formed by the splitting up or reconstruction of an existing business.
An eligible entity wishing to obtain recognition as a startup from DPIIT should make an online application. The application must be accompanied by a copy of the entity’s certificate of incorporation or registration (as the case may be), along with a write up about the nature of its business, how it is working towards innovation, development or improvement of products or processes or services, or its scalability in terms of employment generation or wealth creation. The DPIIT may, after calling for such documents or information and making such enquiries as it may deem fit, recognize the eligible entity or reject the application by providing reasons.
The exemption shall apply from the date of incorporation of the startup, irrespective of the dates on which shares are issued by it, except for the shares issued in respect of which an addition under section 56(2)(viib) of the ITA has been made in an assessment order before 19 February 2019.
The exemption shall be revoked with retrospective effect if the startup invests in any specified assets before the end of seven years (starting from the end of the latest financial year) in which shares are issued at a premium.
In addition to the above, the notification also lays down the procedure for obtaining a certificate for the purposes of section 80-IAC of the ITA, which provides a 100% tax holiday for three consecutive assessment years for certified startups deriving income from eligible businesses.
The business law digest is compiled by Nishith Desai Associates (NDA). NDA is a research-based international law firm with offices in Mumbai, New Delhi, Bengaluru, Singapore, Silicon Valley, Munich and New York. It specializes in strategic legal, regulatory and tax advice coupled with industry expertise in an integrated manner.