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Govt eases norms for start-ups seeking exemptions from 'angel tax'
January, 17th 2019

Facing sustained pressure from start-ups and venture capital funds over the so-called angel tax, the government has relaxed norms for seeking exemptions from the controversial levy. The government, via a notification issued on Wednesday, scrapped the existing mechanism to approve start-ups applying for tax breaks under Section 56(2)(viib) of the Income Tax Act.

While the tax hasn't been abolished outright, as many demanded, start-ups need not go through the inter-ministerial board now. Instead, new applications will be directly evaluated by the Central Board of Direct Taxes (CBDT). Firms will have to submit their applications through the Department of Industrial Policy and Promotion (DIPP) website, after which it will be forwarded to the CBDT. The CBDT has also been mandated to evaluate and respond within 45 days of receiving such applications, a tax official said.

Also, the earlier requirement for start-ups to submit a report from a merchant banker specifying the fair market value of shares may be removed. Firms had complained this was very cumbersome. Angel investors need not share their income certificates with start-ups now.

Venture capital firms, however, remain unsure about how the new rules would help them.

They pointed out that only start-ups approved by the DIPP would be eligible.

The requirement for start-ups to submit a report from merchant banker, specifying the fair market value of shares, has also been removed
“The inter-ministerial board was set up in May 2016, but it received very few applications seeking exemptions from the angel tax," a senior DIPP official said, adding that only two companies had approached the board since the beginning of the current financial year.

Apoorv Ranjan Sharma, co-founder & president, Venture Catalysts, said: “The current regulations provide angel tax exemption only if investors are accredited investors. If investors are not accredited, then the benefit of angel tax exemption is not available to the start-up. Further, the current mechanism involves collecting detailed personal information from each investor on their financial sources for investments. Many a time these investors are sceptical about sharing such information with start-ups. Therefore, very few start-ups come forward to make an application to the DIPP for angel tax exemption."

Apart from the DIPP, the board included officials from the ministry of corporate affairs, information technology, CBDT, Reserve Bank of India, and Securities and Exchange Board of India, among others. The board has conducted about 30 meetings till now.

Last month, the government announced that a committee comprised of experts from the Indian Institutes of Technology (IITs) and the Indian Institutes of Management (IIMs) would be formed as an added apparatus to look into the eligibility of tax exemptions to these start-ups. The latest changes do not mention the fate of this committee.

The government has also changed the eligibility requirements for investors. Earlier, an investor needed to have an average returned income of Rs 25 lakh or more for the preceding three financial years. New norms have changed this to a minimum filed income tax returns of Rs 50 lakh for just one year.

Other norms have remained the same. An investors will still be required have a net worth of Rs 2 crore or more to be eligible for investing in a start-up. Also, a start-up will continue to be eligible if its aggregate amount of paid-up share capital and share premium, after the proposed issues of shares, does not exceed Rs 10 crore.
“This notification is a welcome change and will soothe the nerves of all such start-ups which had been served notices under Section 52(2)(viib) of the Income Tax Act, 1961, by making the application process for seeking exemption simpler. Further, the requirement of submitting a merchant banker report has been done away with. By making the entire process time-bound, the

DIPP has brought about certainty in the exemption process," said Atul Pandey, partner at Khaitan & Co.

DIPP Secretary Ramesh Abhishek said the purpose of the angel tax was to prevent money laundering, and investments made by AIF (alternate investment funds) were exempted from this provision.

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