Government eases conditions to avail safe harbour from Angel Tax

Terms of use

Terms of Use

The use of this site and the content contained therein is governed by the Terms of Use. When you use this site you acknowledge that you have read the Terms of Use and that you accept and will be bound by the terms hereof and such terms as may be modified from time to time.

All text, graphics, audio, design and other works on the site are the copyrighted works of nasscom unless otherwise indicated. All rights reserved.
Content on the site is for personal use only and may be downloaded provided the material is kept intact and there is no violation of the copyrights, trademarks, and other proprietary rights. Any alteration of the material or use of the material contained in the site for any other purpose is a violation of the copyright of nasscom and / or its affiliates or associates or of its third-party information providers. This material cannot be copied, reproduced, republished, uploaded, posted, transmitted or distributed in any way for non-personal use without obtaining the prior permission from nasscom.
The nasscom Members login is for the reference of only registered nasscom Member Companies.
nasscom reserves the right to modify the terms of use of any service without any liability. nasscom reserves the right to take all measures necessary to prevent access to any service or termination of service if the terms of use are not complied with or are contravened or there is any violation of copyright, trademark or other proprietary right.
From time to time nasscom may supplement these terms of use with additional terms pertaining to specific content (additional terms). Such additional terms are hereby incorporated by reference into these Terms of Use.

Disclaimer

The Company information provided on the nasscom web site is as per data collected by companies. nasscom is not liable on the authenticity of such data.
nasscom has exercised due diligence in checking the correctness and authenticity of the information contained in the site, but nasscom or any of its affiliates or associates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this site. The information from or through this site is provided "as is" and all warranties express or implied of any kind, regarding any matter pertaining to any service or channel, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement are disclaimed. nasscom and its affiliates and associates shall not be liable, at any time, for any failure of performance, error, omission, interruption, deletion, defect, delay in operation or transmission, computer virus, communications line failure, theft or destruction or unauthorised access to, alteration of, or use of information contained on the site. No representations, warranties or guarantees whatsoever are made as to the accuracy, adequacy, reliability, completeness, suitability or applicability of the information to a particular situation.
nasscom or its affiliates or associates or its employees do not provide any judgments or warranty in respect of the authenticity or correctness of the content of other services or sites to which links are provided. A link to another service or site is not an endorsement of any products or services on such site or the site.
The content provided is for information purposes alone and does not substitute for specific advice whether investment, legal, taxation or otherwise. nasscom disclaims all liability for damages caused by use of content on the site.
All responsibility and liability for any damages caused by downloading of any data is disclaimed.
nasscom reserves the right to modify, suspend / cancel, or discontinue any or all sections, or service at any time without notice.

For any grievances under the Information Technology Act 2000, please get in touch with Grievance Officer, Mr. Anirban Mandal at data-query@nasscom.in.

New

See all

No notification found.

Government eases conditions to avail safe harbour from Angel Tax

communityadmin

@communityadmin

January 18, 2019

Public Policy

1124

Government eases conditions to avail safe harbour from Angel Tax

Context:

The Department of Industrial Policy & Promotion (DIPP), in consultation with Ministry of Finance (MoF) has released Gazette Notification No. G.S.R 34(E) [“new notification”] in partial modification of Gazette Notification No. G.S.R. 364(E) [“earlier notification”]. The new notification replaces para 4 of earlier notification to provide for approval under section 56(2)(viib) of Income Tax Act, 1961 (“angel tax”).

The concept of angel tax was introduced in 2012 as an anti-abuse measure to deter generation and use of unaccounted money. Section 56(2)(viib) provides that where a private company issue shares at price in excess of Fair market Value (FMV), then such excess amount shall be charged to tax in the hands of the company as ‘income from other sources’. FMV is to be determined in accordance with Rule 11U and 11UA of Income Tax Rules, 1962 or may be substantiated to the satisfaction of AO based on value of assets (including intangible assets). The problem aggravated as valuation is a highly subjective matter. Placing reliance on the satisfaction of AO opened raft of demand notices being sent to startups questioning valuation.

DIPP, in April 2018, released the earlier notification to provide for approval mechanism for availing safe harbour from Angel Tax. However, the arrangement failed to address concerns of startups and investors at large as several startups received income tax notices. In some cases, tax officers even resorted to writing to bankers of the startups and attaching bank accounts to recover the tax amount. Hence, the government has released this new notification in a bid to address the concerns.

Analysis of new notification:

DIPP has now provided for a revised mechanism for startups to avail safe harbour from angel tax retrospectively.

Eligibility criteria for startups: DIPP recognised Start-up are eligible to apply for exemption if the aggregate paid up share capital and share premium after proposed issue does not exceed INR 10 crore. DIPP has not increased this limit and startups having share capital and premium beyond INR 10 crores are still not eligible to apply. It is an acknowledged fact that startup valuations may change drastically based on marketing conditions and performance in due course of time. Moreover, since the provisions apply only to DIPP recognized startups, majority of the startups remain out of the ambit of these provisions. This will discourage larger bets on building unicorns in India. Further, requirement of approval for each tranche of investment (up-to the overall limit of INR 10 crore) still exists even if the investors are same, which may lead to increased compliances and time lag for startups.

Eligibility criteria for investors: Investors should have returned income of INR 50 lakh or more in the preceding financial year (FY) and either its net worth or invested amount should exceed INR 2 crore as on last date of the preceding financial year. The limit on returned income is likely to make small investors ineligible to invest in startups for obtaining approval. However, a positive step in this regard is direct submission of these documents to DIPP, rather than providing it to Start-ups for further submission. This should address concern faced by investors regarding privacy of their information.

Further, the conditions specified for investors are cumbersome and there is no distinction between an investor investing different amount, say, INR 10 lakhs and INR 5 crore. The earlier criteria of average returned income was more relaxed than the new criteria of returned income of the previous FY. Moreover, the investor is now required to satisfy both the conditions simultaneously (unlike earlier where either of the criteria needed to be fulfilled). There also exists ambiguity in the notification due to a possible drafting error as it would be difficult to predict investment amount as on the last date of the FY preceding the year of investment/proposed investment.

Approval process: Approval will now be granted by Central Board of Direct Taxes (CBDT) instead of DIPP administered Inter-Ministerial Board (IMB). This move can also safeguard approved Start-ups from receiving Income Tax notices questioning FMV of shares declared by startups. The new norms are also expected to reduce hassle of the startups as CBDT has been mandated to follow 45-day deadline to approve/reject startup’s request for tax exemption.

Further, doing away with the requirement of merchant banker report is a welcome step. It will now be at the discretion of startup from whom they want to get the shares valued. Only the justification for valuation along with necessary documents need to be submitted to DIPP.

Applicability of the new notification: The notification will apply retrospectively to start-ups that have already raised angel investments in case assessment is pending. This has provided clarity as applicability of earlier notification was not clear on investments already made. Further, it will be a relief for cases that are under process but where assessment order has not yet been passed.

The new notification is effective from immediate effect. However, it will be necessary to also wait for a corresponding notification under section 56(2)(viib) of the Income Tax Act for including such Start-ups under “class of persons” as specified in the section.

This liberalisation is a step forward. We shall keep you posted on further updates.

NASSCOM angel tax policy advocacy

Disclaimer

That the contents of third-party articles/blogs published here on the website, and the interpretation of all information in the article/blogs such as data, maps, numbers, opinions etc. displayed in the article/blogs and views or the opinions expressed within the content are solely of the author's; and do not reflect the opinions and beliefs of NASSCOM or its affiliates in any manner. NASSCOM does not take any liability w.r.t. content in any manner and will not be liable in any manner whatsoever for any kind of liability arising out of any act, error or omission. The contents of third-party article/blogs published, are provided solely as convenience; and the presence of these articles/blogs should not, under any circumstances, be considered as an endorsement of the contents by NASSCOM in any manner; and if you chose to access these articles/blogs , you do so at your own risk.

Download Attachment

communityadmin

Call for Inputs: SEBI's consul...

Swapnil