The new notification from the Central Board of Direct Taxes will exempt startups that meet government definitions from angel tax when raising investments above fair market value. A startup is defined as an Indian entity less than 5 years old with annual revenue under 25 crore involved in developing new technology or intellectual property. However, the exemption only applies to new startups and not existing companies. It provides relief to startups obtaining investments from angel investors or venture capital funds but the tax may still apply after 5 years.

1. New startups meeting govt
norms to escape angel tax

2. Contd…
New business entities, which meet the government-prescribed definition of
`startups', will no longer have to suffer the burden of `angel tax'. This will enable
them to obtain investments from unregistered venture capital funds or high net
worth individuals, without having to pay tax (referred to as angel tax) on the
differential, if the investments made exceed the fair market value of the entity .A
notification from the Central Board of Direct Taxes (CBDT) in this regard,
interestingly, came to light by a late night tweet on Friday by `@StartupIndia', a
government initiative to boost entrepreneurship. It prompted NITI Aayog CEO
Amitabh Kant to respond enthusiastically .
However, this notification is not all-encompassing and will cover only new entities
(which have not yet completed five years) and which meet the prescribed
conditions. Girish Vanvari, tax leader at KPMG (India), says, “The sword hanging on
startups to justify valuation will not be there any more.“ However, he points out, “It
is interesting to note that this concession, under the newly issued CBDT
notification, is available only to startups as defined under the government policy .

3. Contd…
“ Startups are defined by a department of industrial policy and promotion
(DIPP) notification dated February 17, 2016, to mean “an entity, incorporated
or registered in India not prior to five years, with annual turnover not
exceeding Rs 25 crore in any preceding financial year“.
Second, the activities necessary to qualify as a startup are also defined: “The
entity should be working towards development, deployment or
commercialization of new products, processes or services driven by
technology or intellectual property .“
Safeguards are in place to ensure that existing companies do not showcase
themselves as new startups. An application is to be made for recognition as a
startup with the DIPP and if tax benefits are to be claimed, then validation by
an inter-ministerial board is required.

4. Contd…
Recently , many ex-corporate honchos, especially from the IT sector,
invested in their individual capacity in various sectors. If these investee
companies meet the startup definition criteria, they will escape from
the ambit of angel tax. But, as an angel investor points out, “An entity
ceases to be a startup after the initial five years. Thus, my investments
after this period could expose the investee company to angel tax.“
Gautam Nayak, tax partner, CNK & Associates, adds, “While the existing
provision of angel tax not being levied when funds are received from
Sebi-registered venture funds or venture companies will apply even to
existing entities, it is clear the new notification will not cover them as
they will not be certified by the relevant certification authority .“

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(Founder and C.E.O of Saxbee Consultants & Other-Mother
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