Norms for Angel tax relaxed; no tax on issuance of shares up to Rs. 25 crore

The Department for Promotion of Industry and Internal Trade (DPIIT) has issued a new notification in supersession of its earlier notification no. GSR 364(E), dated 11-04-2018. The DPIIT has extended the definition of the start-up and also relaxed norms for the purpose of claiming exemption from applicability of provision of section 56(2)(viib) of the Income-tax Act, 1961 (hereinafter referred to as ‘Angel tax’).

As per new definition, an entity shall be treated as a start-up for a period up to 10 years from its date of incorporation and registration. Earlier this period was 7 years. Similarly, an entity will continue to be recognised as a Start-up, if its turnover for any of the financial years since incorporation and registration has not exceeded Rs. 100 crore as against Rs. 25 crore earlier.

The Govt. has also relaxed the conditions to claim the exemption from the applicability of provision of Angel tax. Consideration received from angel investor by eligible Start-ups for shares issued or proposed to be issued shall be exempt up to an aggregate limit of Rs. 25 crore. Earlier, an start-up could avail the tax exemption only if angel funding doesn’t exceed Rs. 10 crore.

However, the aggregate limit of Rs. 25 crore will exclude consideration received by eligible Start-ups for the following classes of persons

1. non-Resident
2. a venture capital company/venture capital fund
3. listed company having net worth of Rs. 100 crore or turnover of Rs. 250 crore in preceding year

Further, the start-ups claiming exemption from Angel tax shall not be eligible to invest in any of the following assets:

A. land or building being Residential house other than that used for the purposes of renting.

B. land or building not being a residential house other than that occupied by start-up for its business or renting.

C. loans and advances, if the start-ups isn’t engaged in ordinary business of lending of money.

D. capital contribution made to any other entity

E. shares and securities

F. motor vehicle, aircraft, yacht or any other mode of transport, if the cost of such an asset exceeds Rs. 10.

G. any other asset, whether in the nature of capital asset or of the nature specified in sub-clauses (iv) to (ix) of clause (d) of Explanation to clause (vii) of sub-section (2) of section 56.

However, the above conditions are not applicable in case start-up holds the above assets as stock-in-trade, in its ordinary course of business.

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