Effect of Angel Tax on Indian Startup Ecosystem

The Government of India has continuously engaged with all stakeholders to address relevant issues related to the Indian Startup eco-system.

The Department for Promotion of Industry and Internal Trade (DPIIT) issued notification in April 2018 for easing the norms for providing tax exemption to the Startup companies and further amended the notification on 4th February 2019.

As per the notification, an entity is considered as a Startup:

• Upto a period of seven years from the date of incorporation/registration, if it is incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India. In the case of Startups in the biotechnology sector, the period shall be upto ten years from the date of its incorporation and registration.
• Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded Rs. 25 crore
• Entity 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 of employment generation or wealth creation.

Provided that an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’.

A Startup which is recognised by DPIIT is eligible to apply for approval for the shares already issued or proposed to be issued if the following conditions are fulfilled

(i)  aggregate amount of paid up share capital and share premium of the startup after the proposed issue of share, if any, does not exceed ten crore rupees.

(ii) The investor or proposed investor shall have —

(a) returned income of Rs. 50 lakh or more for the financial year preceding the year of investment or proposed investment; and

(b) net worth exceeding Rs. 2 crore or the amount of investment made/proposed to be made in the startup, whichever is higher, as on the last date of the financial year preceding the year of investment or proposed investment.

Provided that in case the approval is requested for shares already issued by the Startup, no application shall be made if assessment order has been passed by assessing officer for the relevant financial year.

The application, accompanied by the documents specified therein, shall be transmitted by DPIIT to CBDT with the necessary documents. CBDT within a period of 45 days from the date of receipt of application from DPIIT may grant approval to the Startup or decline to grant such approval.

The Government has not conducted any survey to assess the adverse effects of angel tax on the Indian startup ecosystem.

This information was given by the Minister of State of Commerce and Industry, C. R. Chaudhary, in written replies in the Rajya Sabha yesterday.