In a series of short tweets, Suresh Prabhu, the Union Minister for Commerce, confirmed the government’s new stance on angel tax for start-ups. This has occurred as the conclusion to a long discussion between troubled start-ups and the government regarding the high taxes. The blanket exemption on angel taxes for start-ups spells good news for these young companies. However, it is important to note that this tax exemption applies to start-ups that are recognized by the DPIIT or Department for Promotion of Industry and Internal Trade. We can expect a gazette notification from the DPIIT confirming the same news shortly.
According to Mr. Prabhu, this tax exemption only applies to every start-up that has an Investment under 25 Crore INR. Furthermore, he also confirmed that the Indian government has changed its definition of start-ups to accommodate more companies under the umbrella. An entity is qualified to be considered as a start-up until 10 years of its existence. Earlier, this was 7 years of existence.
Moreover, there is a new turn-over limit placed for companies to be called start-ups. The current limit now is 100 Crore INR, which is an increase of 4 times from the previous limit of 25 Crore INR.
How can start-ups be exempted from the angel tax?
In order for a start-up to be exempted from the angel tax, the company must first submit self-certified documents and audited financials as well as their income tax returns of the year. After the DPIIT and CBDT (Central Board of Direct Taxes) evaluate the documents, they will add the company in question to a database of start-ups that will not get any tax notice for Angel Tax.
What is the angel tax and why is it a problem?
Angel tax had been introduced in 2012. It was introduced in order to prevent money laundering from occurring. The tax is levied on funding that any company has received. However, the tax is generally levied at any instance where a start-up receives more funding than the total amount that experts consider its fair market value to be.
This tax has been causing a lot of problems because most people believe that there is no fair or accurate method that one can use to measure a ‘fair market value’ of a brand. As a result, most start-ups ended up having a hard time justifying their value to officials from the tax department. This led to a host of grievances. The income tax department had sent many start-ups notices asking for 30.1% taxes. However, many of these start-ups could not afford such high tax amounts. This lead to start-ups contesting the same with the government.
When asked about the angel tax earlier this year, CBDT said “CBDT recognizes that start-ups are going to bring a lot of innovation to the country and, therefore, have to be supported in every possible manner,”
Mr. Prabhu also said that any start-ups who have sent appeals to the income tax department will be exempted from angel tax if they fall under the new parameters of start-ups defined by the government.