In a major relief to several start-ups, the Central Government has widened the definition of start-ups which are entitled to exemption from 'angel tax'. 'Angel Tax' is the market term used for income tax charged under the head "income from other sources" as per Section 56(viib) of the Income Tax Act,1961 on capital raised by unlisted companies by issue of shares at a price in excess of their face value.
Start-up companies raise funds by issuing shares to investors at a premium. Under Section 56(viib), capital so raised becomes "income from other sources", creating tax liability on the investments received by start-ups. This leads to an anomalous situation where the funds received by start-ups for operation and expansion are regarded as "income" under law, so as to attract tax liability. This is commonly called "angel tax", as it is perceived by industry as tax on angel investments made in start-ups.
An entity incorporated in India as private limited company, or partnership firm or limited liability partnership firm will be entitled to tax exemption for a period of ten years from the date of incorporation, if : Its annual turnover in any of the financial years after incorporation does not exceed Rs. 100 crores The entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business mode with high scope of employment and wealth generation. An entity will cease to be a Startup on completion of ten years from the date of its incorporation/registration or if its turnover for any previous year exceeds one hundred crore rupees.
Courtesy/By: Sakshi Shukla
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21 Feb 2019
