Government relaxes norms for startups: Here's what experts have to say

Giving major relief to budding entrepreneurs, the government on Tuesday relaxed the definition of startups, and allowed them to avail full angel tax concession on investments worth up to Rs 25 crore.

Earlier, a startup was allowed to avail tax concession only if total investment, including funding from angel investors, did not exceed Rs 10 crore.

"Considerations of shares received by eligible startups for shares issued or proposed to be issued by all investors shall be exempt up to an aggregate limit of Rs 25 crore," commerce and industry minister Suresh Prabhu said in a series of tweets.

The development assumes significance as several startups have claimed to receive angel tax notices, impacting their businesses. Various startups have raised concerns on notices sent to them under section 56(2)(viib) of Income Tax Act, 1961, to pay taxes on angel funds received by them.

The minister said that a notification regarding simplifying the process for startups to get exemptions on investments under section 56(2)(viib) of Income Tax Act will be issued on Tuesday by the Department for Promotion of Industry and Internal Trade (DPIIT).

To provide these tax concessions, the department has relaxed the definition of startups.

Now "an entity shall be considered as startup if its turnover for any of the financial year, since its incorporation or registration, has not exceeded Rs 100 crore instead of the existing Rs 25 crore," he said.

Besides, investments by listed companies with a net worth of Rs 100 crore or turnover of Rs 250 crore into an eligible startup would also be exempted from the section 56(2)(viib), beyond the Rs 25 crore limit.

"Considerations of shares received by eligible startups for shares issued or proposed to be issued by all investors shall be exempt up to an aggregate limit of Rs 25 crore," he added.

Also, investments into eligible startups by non-residents, alternate investment funds - category I - shall also be exempt under this section beyond the limit of Rs 25 crores.

Further, an entrepreneur will also be eligible for exemption if it is a private limited company recognised by the DPIIT, and is not investing in specified asset classes.

However one concern remains unanswered -- the government hasn't made any clarification on the contentious issue of section 68 of the Income Tax Act, which deals with "unexplained fund receipts". Under this section, the government had taken action against some startups.

CNBC-TV18 caught up with Padmaja Ruparel, president, Indian Angel Network; Nakul Saxena, director - public policy, iSPIRT; Sachin Taparia, chairman and CEO, LocalCircles; K Ganesh, serial entrepreneur, growthstory.in and Sreejith Moolayil, co-founder and COO, True Elements, to discuss and understand the measures.

Padmaja Ruparel said, "I would like to share that we have come a long way from 2012, when section 56 was first promulgated under the last government and today we are seeing light at the end of the tunnel in some ways. So, I would like to first record my appreciation for the Prime Minister's vision. DPIIT and CBDT have come together to try and at least find a solution which I think is very elegant and tried to resolve many of the issues."

"The message the government has given is that India will not only be the world's start-up hub but start-ups which can go global, by increasing the turnover from Rs 25 crore to Rs 100 crore. This is a seminal move for angel investing..." she said.

Nakul Saxena said, "We have been talking to the government and it has considered our recommendations and has accepted that. So, this should cover about 98-99 percent of the concerns of the startup ecosystem in relation to the angel tax issue. "

Sachin Taparia said, "I think startups will have to apply separately for getting recognised by DPIIT and along with that they will have to submit the three documents which is the ITR, the balance sheet and investment declaration that the startups are not investing in moveable assets like real estate or premium cars or jewellery."

"It really solves issues related to section 56. What it doesn't solve is section 68 which is the source of funds which according to the conversations that we have had with CBDT on this matter is something that they must verify and what they are really looking for is the PAN number of all the investors to make sure that it is tax paid income and not black money being invested in startups," Taparia added.