Devil in the Angel Still Exists…

By Hema Lohiya and Manshi Golchha

India is the third largest start-up economy in the world the culture of innovation and entrepreneurship have been taking firm roots in the country. 

The Indian youth wants to innovate and experiment with ideas. They want to be job creators rather than job seekers and considering opportunities in various fields in India, there has been a flurry of start-ups in India. 

The government has done its bit to support start-up dreams by means of flagship programmes such as ‘Make in India’, ‘Start-up India’ and other similar schemes.

A successful start-up is a major source of revenue, employment, and a boost for the economy.

While there may be a different understanding of the start-ups by regulatory law and the layman, the start-up under the tax law is defined as under:

The start-up should be incorporated as a private limited company or registered as a partnership firm or a limited liability partnership;

Turnover should be less than INR 100 Crores in any of the previous financial years;

An entity shall be considered as a start-up up to 10 years from the date of its incorporation; and

The start-up should be working towards innovation/ improvement of existing products, services and processes and should have the potential to generate employment/ create wealth. An entity formed by splitting up or reconstruction of an existing business shall not be considered a Start-up.
  
With buzzing opportunities, the one thing, which is still a reason to worry, is ‘Angel tax’. The Finance Minister has also recognized the requirement to resolve angel tax issues in the speech of Finance Bill.

Angel tax is a term referred for tax payable by unlisted companies on the consideration received on issue of shares, which is in excess of the market value of the shares defined.
Given a strong opposition, relief was provided for the start-ups from angel tax, provided the following conditions were satisfied:

The entity should be a recognised start-up by the Department for Promotion of Industry and Internal Trade (DPITT); and

The aggregate amount of paid-up share capital and share premium of the start-up after the proposed issue of a share, if any, should not exceed INR 25 Crore. 

In computing the aggregate amount of paid-up share capital, the amount of paid-up share capital and share premium of INR 25 crore a non-resident and venture capital company or venture capital fund is not to be included.  

In the Union Budget, the Hon’ble Finance Minister has provided some more reliefs for start-ups, which are as under:

start-ups exempted from angel tax will not be subjected to any kind of scrutiny in respect of valuations of share premium;

With an e-verification mechanism, the funds raised by start-ups will not require any kind of scrutiny from the Income Tax Department;

Special administrative arrangements shall be made by 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 is carried out by the Assessing Officers without obtaining approval of their supervisory officer;

Further, the Hon’ble Finance Minister proposed to extend the sunset clause under section 54GB to 31 March 2021. As per section 54GB, the capital gains exemption can be claimed on the sale of residential property provided the net consideration is invested in the start-up. Also, the Budget has relaxed certain conditions for said eligibility (one of them being a requirement of minimum holding in start-up by the assessee from 50 percent to 25 percent). 

Perhaps entities falling within the definition of start-ups could expect relief from angel taxation. However, the big question is what about those companies, who may not fall within the definition of start-ups? As per a recent report of NASSCOM, about US$ 4.3 billion funding has been received in 2018 (January to September) by various companies.

The type of funding received by companies at various growth stages are as under:

Bootstrap USD 50,000 to USD 1,50,000
Angel or Seed fund USD 1,50,000 to USD 0.5 million
Pre-Series A USD 0.5 million to USD 2 million
Series A USD 2 million to USD 5 million
Series B to E USD 5 million to USD 1 billion
Initial public offering (IPO) USD 1 billion and above

As can be observed, most companies (whose share capital, including securities premium, could exceed INR 25 crore) would not fall within the definition of start-ups and continue to battle their fight with angel tax.

Further, if the object of the introduction of angel tax was to curb the laundering of funds, there should also be an exemption from said taxation if the creditworthiness and genuine character of investors are proved. No such relief has been made available under the said section. It is a blanket section, which provides to tax the capital receipts.

All safeguards as provided should be addressed so that genuine investors (who may not qualify as start-ups) are not harassed. 

We hope anti-abuse provisions are used with caution and only in the required situation and not for disrupting the business of the genuine business community.   

Hema Lohiya is Partner and Manshi Golchha is Deputy Manager with Deloitte Haskins and Sells LLP 

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