How to Avoid Angel Tax for Start-Ups! Angel Tax Exemption Procedure

How to avoid angel tax for start-ups and how to get Angel tax exemption is the hottest debated topic in start-up circles, the income tax department has been sending notices after notice too many start-ups questioning their valuation as to how the company shares can be valued at such a price , it raised suspicion as to the genuineness of the transaction and to check if black money was converted and disguised as share premium  lets understand what is Angel Tax under Income Tax Laws.

WHAT IS ANGEL TAX ON START UP’S?

Angel tax is a term used to refer to the income tax payable on capital raised by unlisted companies via issue of shares where the share price is seen in excess of the fair market value of the shares sold. The excess realisation is treated as income and taxed accordingly. Income tax Department has been empowered under Section 56(2) (viib) of the Income Tax Act

For being eligible for exemption under Section 56(2)(vii), a startup should not be investing in immovable property, transport vehicles above ₹10 Lakh, loans and advances, capital contribution to other entities and some other assets except in the ordinary course of its business

A startup shall also be eligible for exemption under Section 56(2)(viib) if it is a private limited company recognised by the department for promotion of industry and internal trade (DPI) and is not investing in specified asset classes.

Eligible startups only have to file a duly signed self-declaration by with DPIIT for availing exemption. DPIIT shall transmit these declarations to Central Board of Direct Taxes (CBDT).

Further, there is no requirement of making any application for exemption under this section and there will be no case-to-case examination of startups for exemption under Section 56(2)(viib) of Income Tax Act

The valuation of shares is no more a criterion for exemption of investments into eligible startups under Section 56(2)(viib) of Income Tax Act

Please note Angel Investor means investment by resident individuals up to the capital of Rs 10 Crores in a startup NOW INCREASED TO Rs 25 Crores,, this does not include Investment made by Foreign Nationals or Non Residents

NEW DEFINITION OF STARTUPS?

An entity shall be considered as a startup if its turnover for any of the financial year, since its incorporation or registration, has not exceeded ₹100 crore instead of the existing ₹25 crore which is expected to give a lot

Earlier Procedure prior to Notification dated 16th January 2019

1. Register the Company as Startup in DIPP
2. Get the Valuation done by level 1 Merchant Banker  Not Required
3. Submit it to Interministerial Board for Approval
4. Angel Investor means an investor with investment up to 10 Crores New Limit 25 Crores

This caused a lot of issues to start up as the cost of getting the Certificate from Merchant Banker would Start form INR 1,00,000 and sometimes went upwards of INR 10,000,00

NEW Procedure for Obtaining Exemption form Angel Tax effective 16th Jan 2019 Notification 

• For the Startup to be eligible for Angel Tax Exemption, the aggregate amount of paid-up share capital and share premium of the Startup after the proposed issues of shares, should not exceed INR 10 Crores
• For the Investor to be eligible for Angel Tax Exemption, she/he should have filed Income tax returns of at least INR 50 Lakhs for the year preceding the investment year.
•  The investor’s net worth should exceed INR 2 Crores or the amount of investment proposed in the Startup, whichever is higher, as on the last date of the financial year preceding the investment year
• To further the ease of application the department has decided that the Startups are not required to submit investor income and net worth details Keeping confidentiality of investor tax returns and a net worth certificate in mind, the investors can now directly upload these details on the DIPP portal.
•  Angel Tax exemption applications of DIPP recognized startups will be directly evaluated by CBDT directly not by Inter-Ministerial Board
• To ensure quick processing of Angel Tax exemption application, CBDT will evaluate and respond within 45 days of receiving applications from DIPP.
• The scope of the Angel Tax exemption extends to all past and future investments and applies for startups incorporated before April 2016 as well.Application for approval under this para shall be made in Form-2 to DIPP and shall be accompanied by the documents specified thereinNote: Provided that in case the approval is requested for shares already issued by the Startup, no application shall be made if assessment order has been passed by assessing officer for the relevant financial year.

FORMAT OF FORM 2

Form-2 Application for approval for the purposes of section 56(2)(viib) of the Income-tax Act, 1961

1. 1. Name of the Startup – …………………………………

2. 2. Date of incorporation of Startup as company-

3.Incorporation No-…………………………………

4. 4. Address and business location-…………………………………

5. 5. Nature of business- …………………………………

6. 6. Contact details of Startup (Phone No. and Email)-…………………………………

7. 7. Permanent Account No-…………………………………

8. 8. Startup Recognition number allotted by DIPP- …………………………………

9. 9. Existing/proposed activities-…………………………………

10. 10. Details of share capital as on the date of application- (i) Amount of share capital……… (ii) Issue price and date of issue of sh…….. (iii) Type of shares………… (iv) Number of shares……… (v) Face value………… (vi) Amount of share premium……

11. 11. Details of existing shareholders- (i) Name(s)-……….. (ii) PAN-…… (iii) Residential status-……….. (iv) Address-………… (v) Number of shares-………. (vi) Type of shares-………… (vii) Face value-………… (viii) Issue Price and date of issue-……….. (ix) Amount of share premium-……

12. 12. Details of shares along with shareholders for which certification for exemption is sought— (i) Name(s)-……….. (ii) PAN-…… (iii) Residential status-……….. (iv) Address-………… (v) Number of shares-

………. (vi) Type of shares-………… (vii) Face value-………… (viii) Issue Price and date of issue of shares

(existing as well as proposed)-……….. (ix) Amount of share premium-……

13. Justification for valuation of shares along with supporting documents, if any.

Declaration I/We hereby certify that the above information furnished by me is true and no relevant information has been concealed. For (Name of the Startup) (Name of the authorised signatory)

Designation Place:  Date:

This form shall be accompanied by the following documents —

•  the annual accounts of the startup for the last three financial years (if the Startup is in existence for less than three years, then annual accounts from the date of its incorporation);
• Copies of Income Tax returns of the Startup for the last three financial years (if the Startup is in existence for less than three years, then copies of Income Tax returns from the date of its incorporation);

The following documents shall be submitted by the investor(s) directly to DIPP—

Copies of income- tax return and net worth certificate of the investor for the relevant financial year.

For any support/query relating to filing of angel exemption for start ups , please contact experts Virtual auditor at +91 9962230333 / 044 -48560333 or [email protected]