The Complexities Surrounding Angel Tax

Angel Tax

Introduction

The Department for the Promotion of Industry and Internal Trade (“DPIIT”) of the ministry of Commerce and Industry has issued a new notification bearing number G.S.R 127 (E) dated 19th February 2019 (“the Notification”) with regard to the exemptions available to startups with respect to angel tax. The Notification supersedes all earlier notifications on the subject matter of angel tax.

Changes Introduced By The Notification

The changes brought about by the Notification are as under:

  • The definition of “startup” has been amended to mean an entity which has been incorporated for a period of ten years (as opposed to the earlier period of 7 years) provided it has not crossed 100 crores in revenue in any of the past ten years. The limit was 25 crores under the earlier notifications.
  • An entity will be entitled to exemption from angel tax in the event
  • It is recognised as a “startup” by the DPIIT;
  • The aggregate amount of investment received by the startup does not exceed Rs. 25 crores (earlier it was Rs. 10 crores).
  • In calculating the limit of Rs. 25 crores investments from non-residents, venture capital companies or venture capital funds are to be excluded.
  • The startup has not and shall not for a period of 7 years invest the investment monies in the following assets:

(a) building or land, being a residential house, other than that used by the startup for the purposes of renting in the ordinary course of business;

(b) land or building, or both, not being a residential house, other than that occupied by the startup for its business or used by it for purposes of renting in the ordinary course of business;

(c) loans and advances, other than loans or advances extended in the ordinary course of business by the startup where the lending of money is substantial part of its business;

(d) capital contribution made to any other entity;

(e) shares and securities;

(f) a motor vehicle, aircraft, yacht or any other mode of transport, the actual cost of which exceeds Rs. 10 lakhs, other than that held by the startup in the ordinary course of business; and

(g) jewellery other than that held by the startup in the ordinary course of business.

Our Comments

The amendments have paved a way for substantial relaxations for startups from angel tax and will be particularly helpful to early stage startups receiving seed funding. The investment restrictions on startups does not however seem necessary as some start ups will use the investment monies for expansion plans and acquiring other entities.

 

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