The term “angel tax” has been making rounds in the business and investment world, causing much concern and confusion among entrepreneurs and investors alike. But what exactly is angel tax and how does one qualify for its exemption? In this article, we will unravel the eligibility criteria for angel tax exemption and shed light on its importance for startups and angel investors.
Firstly, let us understand what angel tax is. Angel tax is a tax levied by the government on funds raised by a startup through angel investors above their fair market value. It was introduced as a measure against money laundering and to prevent the flow of black money in the economy. However, it posed a major setback for startups as the tax rate of 30.9% significantly reduced the value of funds raised, making it harder for them to sustain and grow.
In order to support and encourage the growth of startups, the Indian government has introduced a provision for angel tax exemption. This exemption can be availed by startups that meet certain eligibility criteria as outlined by the Department for Promotion of Industry and Internal Trade (DPIIT).
The first and foremost criterion for angel tax exemption is that the startup must be a recognized entity by DPIIT and must be registered with the Ministry of Corporate Affairs (MCA). Additionally, the startup must be incorporated as a private limited company, limited liability partnership, or partnership firm. This ensures that the startup is a legitimate entity and has a proper structure in place.
Another crucial criterion is that the startup must not have a turnover of more than INR 25 crores in any financial year. This means that the startup must be in its early stages and have a limited revenue stream. This criterion aims to benefit small and upcoming startups that are struggling to raise funds and need support to establish themselves in the market.
Furthermore, the startup must be involved in developing, innovating, or improving products, processes, or services that are innovative, scalable, and commercializable. In simpler terms, the startup must have a unique and viable business idea that has the potential to grow and create employment opportunities. This criterion aims to promote and support startups with innovative ideas that can contribute towards the growth of the economy.
Apart from meeting the above-mentioned criteria, the startup must also have a minimum of 20% equity held by Indian residents. This ensures that the funds raised by the startup are invested and utilized within the country, promoting the growth of the Indian startup ecosystem.
Additionally, the investor must be a recognized angel investor as per the DPIIT guidelines. An angel investor is an individual or a group of individuals who invest in startups in their early stages in exchange for equity. This criterion aims to ensure that the investors are genuine and have the required experience and knowledge to support and guide startups.
In order to avail the exemption, the startup must submit valid documents and proofs to the tax authorities, including a certificate from DPIIT and a valuation report by a merchant banker. The valuation report must justify the valuation of the startup by providing a detailed and logical analysis of the company’s future prospects.
To understand the eligibility criteria better, let us take a practical example. XYZ Pvt. Ltd. is a startup that develops innovative and eco-friendly packaging solutions. The company is registered with the MCA and DPIIT, has a registered office in India, and has a turnover of less than INR 25 crores. The company has 25% equity held by Indian residents and has received funding from a recognized angel investor. In this case, XYZ Pvt. Ltd. meets all the eligibility criteria and can avail angel tax exemption.
In conclusion, the eligibility criteria for angel tax exemption aim to support and encourage the growth of startups in India. By providing exemptions, the government is promoting entrepreneurship, innovation, and job creation. It is imperative for startups to understand and fulfill the eligibility criteria to avail the exemption and further their growth in the competitive market. It is also essential for angel investors to be aware of the eligibility criteria to make informed investment decisions and support startups in their journey towards success.