This PPT explains about Angel Tax & Start-Ups:
1. What is Angel Tax?
2. What are Startups?
3. Is every startup eligible for benefit under Income Tax Act?
4. Tax Rates of Startups
5. Relaxation from Angel Tax
6. Exemptions from Angel Tax
7. Computation of Angel Tax
8. Computation of Fair Market Value of Shares, etc.
For more updated information on Angel Tax & Startups, click here: http://bit.ly/2JRvx7H
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Young ventures that is just beginning to develop
Handful of founders
Driven by latest technology
Driven by innovation
Have rapid growth prospects
What are Start-ups?
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Is every small business a Start-up?
NO.
HOW?
The growth intent
The funding methods
Different “End visions”
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Is every startup eligible for benefit under Income Tax Act?
NO.
The department of promotion of industry and internal trade defines a startups as follows:
► Entity can be registered as either
Private limited company; or
Partnership Firm; or
LLP
► The entity can be considered as a startup for a period of 10 years from the date of its incorporation/
registration.
► T.O. of the entity doesn’t exceed Rs. 100 crores in any of the financial years since incorporation or
registration.
► Entity is working towards innovation, development of products, process or services; or it shall be a scalable
business model with a high potential of employment generation or wealth generation.
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What shall not be regarded as a Startup under IT Act?
Any entity not satisfying the conditions mentioned in the previous slide; and
Any entity formed by splitting or reconstruction of an existing business.
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Recognition of startup under IT Act
Why is recognition important for startups under the Income tax Act?
To claim various relaxation from various provisions under the Act.
Process of recognition for under the Act
Incorporate your business either as Pvt. limited co. or partnership firm or LLP
Make online application in form 2 to the DPIIT
Application can be made over the mobile app or the portal set up by DPIIT
Application shall be accompanied by
• A copy of certificate of incorporation or registration;
• A write up about the nature of business highlighting how its working towards development or
innovation or scalable project
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Tax rates of startups
Following are the tax rates applicable in case of startups based on their status
Type of business entity Income Tax Rate
Partnership/ LLP 30% of income
Closely held company 25%/ 30% of income
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Relaxations under the IT Act for Startups
► Tax holiday for three consecutive years (80IAC)
► Carry forward of losses despite substantial change in ownership
► Relaxation from Angel tax
► Capital gains exemption to the investors
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Tax holiday for three consecutive years (80IAC)
► Conditions to be fulfilled by the startup to claim deduction u/s 80IAC: -
• A Private limited company or LLP.
• Engaged in innovation, development or improvement of products or processes or services or a scalable
business model with a high potential of employment generation or wealth generation.
• Incorporated on or after April 1, 2016 but before April 1, 2021.
• The paid up share capital shall not exceed 25 crores in any previous year for which deduction is to be
claimed.
• It shall hold a certificate of eligible business from the Inter-ministerial board of certification as notified
by the CG.
► Exemption available
• Exemption can be claimed @ 100% of profits from such business for 3 consecutive assessment years.
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Carry forward of losses despite substantial change in ownership
Carry forward is allowed as long as at least 51% of voting power in the year of incurrence of loss continue
to be the same in the year of carry forward
This condition is not applicable in case of startup
The only condition for carry forwards is that all the shareholders in the year of loss shall be holding the
shares in the company in the year of carry forward.
Loss can be carried forwards for a period of 7 years
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Relaxation from Angel tax
Startups are exempted from payment of Angel tax
Conditions are to be fulfilled to claim such exemption
Compliance to claim such exemption (Form 2)
Tax rate is as per the normal rate of Income tax as applicable in case of the startup
Exemption withdrawn if conditions not fulfilled
Introduced in F.A. 2012
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What is Angel Tax?
► Income tax
► Levied on amount received exceeding the FMV and FV of share
► Of closely held company
► Investor must be a resident person
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Exemptions from Angel Tax
Following conditions are to be satisfied to claim exemption: -
T.O. shall not exceed Rs. 100 Cr. In any of the 10 financial year in which it is claiming to be a startup
Co. shall be engaged in developing or innovating idea or scalable project generating employment
Paid up share capital including premium shall not exceed Rs. 25 Cr
Exemption is available w.r.t. all shares issued
Not available for shares in respect to which addition has already been made
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Calculation of paid up share capital (56(2)(viib))
► While calculating any amount received from following persons shall not be included: -
• Non resident persons
• Venture capital fund and venture capital company
• Listed company having net worth exceeding Rs. 100 crores (on the last date of preceding financial
year) or turnover exceeding Rs. 250 crores (in preceding year)
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Condition to claim exemption (56(2)(viib))
► To claim exemption under the said provision, it is restricted to invest in following assets: -
• Land or building, being a residential house, other than that used for the purposes of renting
• Land or building, not being a residential house, other than that occupied by start-up for its business or
renting
• Loans and advances, if start-up isn't engaged in ordinary business of lending of money
• Capital contributions made to any other entity
• Shares and securities
• Motor vehicle, aircraft, yacht or any other mode of transport, if the cost of such an asset exceeds Rs. 10
lakhs.
• Jewellery held otherwise than as stock in trade
• Archaeological collections, drawings, paintings, sculptures, any work of art or bullion
► Such restriction shall be applicable for 7 years from the end of the financial year in which shares were
issued at premium.
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Computation of Angel Tax
Angel tax shall be calculated as follows: -
Amount exceeding FMV and FV of the share of the startup
Such income is to be included in income of the startup
Income is to be assessed as “Income from other sources”
Tax rate shall be the normal tax rate as applicable in case of such startup
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Computation of Fair Market Value of shares (Rule 11UA)
Method 1: -
(A- L) * PV
PE
A: - book value of assets in the B/S, reduced by TDS, TCS, Advance tax and deferred expenditure
L: - book value of liability not including S/C, proposed dividend, reserves and surplus, provisions,
contingent liability
PE: - total amount of paid up share capital
PV: - paid up value of such equity share
► Method 2: -
Valuation to be done by Merchant Banker as per discounted free cash flow method.
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Computation of Angel Tax
Example 1: -
Face value of share of a startup A Ltd: - Rs. 10
Fair market value of share of A Ltd: - Rs. 50
Issue price to Mr. X(investor): - Rs. 60
No. of shares purchased: - 1,000
Income to be included in the hands of A Ltd.: - Rs. (60-50)*1000 = Rs. 10/- per share*1000 = Rs.10,000
Rs. 10,000 are to be assessed as “Income from other sources” and tax is to be levied on the same.
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Computation of Angel Tax
Example 2: -
Face value of share of a startup A Ltd: - Rs. 10
Fair market value of share of A Ltd: - Rs. 50
Issue price to Mr. X(investor): - Rs. 40
No. of shares purchased: - 1,000
No income shall be included in the hands of the company rather the income shall be included in the hands of
the investor.
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Income taxable in the hands of the investor
Where amount paid to purchase share of a company
Exceeds the Face Value of the share but less than the FMV
Differential amount between the FMV and the issue price is to be taxed in the hands of the investor
Taxability only if the difference exceeds Rs. 50,000.
Taxable as “Income from other sources”
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Capital gains exemption to the investor
Section 54GB
Long term capital gains are exempt
Arising from transfer of residential house property
Benefit available only in case where gains are invested in shares of an “Eligible startup”
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Summary
► If shares are issued by a closely held company + at price higher than FMV and FV + investors are residents
► ANGEL TAX is levied
► Exemption criteria to be fulfilled if the company is an eligible startup + amount not invested in specified
assets + paid up share capital not exceeding Rs. 25 crore