The Central Board of Direct Taxes (CBDT) on Monday increased the tax exemption limit for startups to Rs 25 crore from earlier Rs 10 crore, CNBC-TV18 reported, citing sources. This comes as a big relief for startups. The
Angel Tax, a 30 percent tax levied on investments made by external investors in startups, had made life difficult for entrepreneurs, with many receiving income tax notices in 2018. Tax for startups
The tax for
startups is the tax such companies have to pay on the angel funding they receive and comes under the definition of angel tax. It is the income tax payable on capital raised by unlisted companies.
The capital, in this case, is generally raised through the issue of shares where the issue price is exceeding the fair market value of the shares sold. It was not called Angel Tax, but because it affects startups which opt for angel funding, it is now referred with this term. The tax was introduced in the Union Budget 2012, with the aim of keeping a check on money laundering.
What makes a startup eligible for the tax exemption
The tax exemption was given to the startups under the government's Startup India initiative to promote the sector. As per the action plan, a start-up is defined as an entity, incorporated or registered in India not prior to five years, with annual turnover not exceeding Rs 25 crore in any preceding financial year, working towards innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property.
The startups are allowed to avail for the concession only if total investment, including funding from angel investors, is not exceeding Rs 25 crore.
The Central Board of Direct Taxation (CBDT) examines the credentials and decide whether the startup is credible for the exemption certificate.
The startups with more than Rs 25 crore of investment will continue to pay 30 percent angel tax.
How the startups can apply for the tax exemption
The government, in January,
eased the procedure for startups to seek income tax exemption on investments from angel funds.
To get the exemption, firstly, the startup should apply, with all documents, to the Department for Promotion of Industry and Internal Trade (DPIIT) after which the application of the recognised startup will be moved to the CBDT.
The company is required to submit documents detailing fundings, the balance sheet stating the overall financial health, account details and the return of income for the last three years, among others.
The startups will also have to furnish the financial health of investor companies. Investors with a net annual income of Rs 50 lakh in the tax return in the previous financial year the net worth of the investors should exceed Rs 2 crore.
The revised norms would apply to startups seeking exemption after the issuance of the notification.The new norms would not apply to those entrepreneurs who have received notices from tax authorities.