Startups get another leg-up; exempted from Angel tax

The Modi-led government is leaving no stone unturned to help the already blown-up startup space in India. In a major incentive, the government is now allowing startups to issue shares to investors at higher than fair value without worrying about tax consequences.

The notification implies that in case a startup gets investment from resident angel investors, family offices or funds which were not registered as venture capital funds; it will not be taxed even if the investment is made in excess to the fair value.

“The exemption provided to startups from the ‘rigour’ of section 56(2)(viib) of Income Tax Act has been long awaited. It has been a long-standing industry demand to abolish this Angel tax,” Amit Maheshwari, Partner Ashok Maheshwary and Associates LLP, said.

Under Indian tax law, if an Indian company receives share subscription amount from an Indian resident which exceeds the fair value of shares, then the excess amount is taxed as income of the Indian company, said Rajesh H Gandhi, Partner, Deloitte Haskins and Sells LLP.

The notification now exempts startups from this rigorous provision. A similar exemption already exists for Venture Capital Funds (VCFs). However, Angel tax still poses a threat to earlier investments, which could be perceived as being overvalued in light of the declining valuations globally and in India.

In January, Prime Minister Narendra Modi’s had unveiled a slew of incentives to boost startup businesses, offering them a tax holiday and inspector raj-free regime for three years, capital gains tax exemption and Rs 10,000 crore corpus to fund them.