In the recently announced Finance Bill (No.2) 2019, emphasis was given to a great extent to incentivise startup businesses and facilitate ease of doing business.
The ‘Angel Tax’ issue has been put to rest in the current Finance Bill. Angel Tax is a tax that was being levied on the funding received by startups from external investors at a valuation higher than the 'fair market value' of the shares of those companies. In the recent past, many Indian startups have received tax notices from the income tax department in this regard.
To resolve the so-called Angel Tax issue, an amendment is proposed that the startups and their angel investors who file requisite declarations and provide information in their returns will not be subjected to any kind of scrutiny in respect of valuations of shares.
Further, startups are no more required to justify the fair market value of their shares issued to specified investors, which now include Alternate Investment Funds (AIFs) Category-II also. Earlier startups feared being taxed on share premium received over the fair value of shares issued to the said AIFs.
To further facilitate the ease of doing business, it is proposed to amend Section 79 so as to provide that loss incurred in any year prior to the previous year in the case of closely-held eligible startup shall be allowed to be carried forward and set off despite change in shareholding. This was not a possibility earlier.
Another important amendment is proposed under section 54GB of the Income Tax Act. The existing provisions provide for rollover benefit in respect of capital gain arising from the transfer of a residential property owned by an individual assessee.
To be able to get the benefit of this provision, the assessee is required to utilise the net consideration for subscription in the equity shares of an eligible startup. The assessee is required to have more than 50 percent share capital or more than 50 percent voting rights after the subscription in shares in the startup.
In order to incentivise investment in eligible startups, it is proposed to amend the said section so as to relax the condition of minimum shareholding of 50 percent of share capital or voting rights to 25 percent.
This is a welcome move because this condition was detrimental for inviting any investors as startups were not willing to give away 50 percent of their stake at the initial stage when they expect a higher valuation of their up company later.
Kirti Shah is executive director KPMG in India. Kirti had support from Sumeet Agarwal, manager, KPMG in India, for the article.