To resolve the so-called 'angel tax' issue, the start-ups and their investors who file requisite declarations and provide information in their returns will not be subjected to any kind of scrutiny in respect of valuations of share premiums, she said.
Illustration: Dominic Xavier/Rediff.com
The government on Friday proposed a host of incentives, including a special arrangement for resolution of pending assessments of income tax cases, with a view to encouraging start-ups.
Finance Minister Nirmala Sitharaman in her Budget speech said that start-ups in India are taking firm roots and their continued growth needs to be encouraged.
"To resolve the so-called 'angel tax' issue, the start-ups and their investors who file requisite declarations and provide information in their returns will not be subjected to any kind of scrutiny in respect of valuations of share premiums," she said.
The issue of establishing the identity of the investor and source of his/her funds will be resolved by putting in place a mechanism of e-verification.
With this, funds raised by start-ups will not require any kind of scrutiny from the Income Tax Department, she said.
She also said that special administrative arrangements would be made by the Central Board of Direct Taxes (CBDT) for pending assessments of start-ups and redressal of their grievances.
"It will be ensured that no inquiry or verification in such cases can be carried out by the Assessing Officer without obtaining approval of his supervisory officer," Sitharaman said.
At present, start-ups are not required to justify the fair market value of their shares issued to certain investors including Category-I Alternative Investment Funds (AIF).
"I propose to extend this benefit to Category-II AIFs also. Therefore, the valuation of shares issued to these funds shall be beyond the scope of income tax scrutiny," the minister said.
Investments made by these funds would be exempted from section 56(2)(viib) of the Income-tax Act.
An angel investor puts funds in a startup when it is setting up its business in the competitive market.
Normally, about 300-400 startups get angel funding in a year.
Their investment in a unit ranges between Rs 15 lakh and Rs 4 crore.
Giving a major relief to budding entrepreneurs, the government in February relaxed the definition of start-ups and allowed them to avail full angel tax concession on investments of up to Rs 25 crore.
After claims being made by several start-ups that they were receiving tax notices under section 56(2)(viib) of the Income Tax Act, 1961, to pay taxes on angel funds received by them, the Department for Promotion of Industry and Internal Trade (DPIIT) in consultations with CBDT resolved the issue.
Section 56(2)(viib) of the I-T Act provides that the amount raised by a start-up in excess of its fair market value would be deemed as income from other sources and would be taxed at 30 per cent.
Touted as an anti-abuse measure, this section was introduced in 2012.
It is dubbed as angel tax due to its impact on investments made by angel investors in start-up ventures.
More than 540 start-ups have received an exemption from angel tax so far.
The finance minister also proposed to relax certain conditions for carry forward and set off of losses in the case of start-ups.
"I also propose to extend the period of exemption of capital gains arising from sale of residential house for investment in start-ups up to March 31, 2021, and relax certain conditions of this exemption," she said.
The finance minister also announced tax incentives for budding entrepreneurs.
"The condition for carry forward and set off of losses in cases of eligible start-ups is proposed to be relaxed enabling them to carry forward their losses on satisfaction of any one of the two conditions -- continuity of 51 per cent shareholding/voting power or continuity of 100 per cent of original shareholders," she said.
The minister added that the condition of minimum holding of 50 per cent of share capital or voting rights in the start-up is proposed to be relaxed to 25 per cent.
"The condition restricting transfer of new asset being computer or computer software is also proposed to be relaxed from the current five years to three years," Sitharaman said.
She said that the tax proposals are aimed at encouraging start-ups by releasing entrepreneurial spirits.
Sitharaman said an exclusive television channel is proposed to be set up for start-ups that will serve as a platform for discussing issues affecting their growth and match-making with venture capitalists.
"This shall serve as a platform for promoting startups, discussing issues affecting their growth, match-making with venture capitalists and for funding and tax planning.
“This channel shall be designed and executed by startups themselves," she said.
The government launched the 'Startup India' initiative on January 16, 2016, to build a strong ecosystem for nurturing innovation and entrepreneurship.
It also provides certain tax and other incentives.
So far 19,665 start-ups are recognised by the Department for Promotion of Industry and Internal Trade (DPIIT).
They are eligible for availing tax and other incentives.