Overview of Angel Tax Exemption
Angel tax is a term commonly used to describe the tax applied to investments made by angel investors in startup companies. Angel investors are individuals or groups who invest in early-stage, high-potential businesses in exchange for an equity ownership stake. The Indian government introduced the Angel Tax Exemption in 2012 to promote entrepreneurship and foster growth in the startup ecosystem. In this article, we will provide an overview of the Angel Tax Exemption and its requirements.
What is Angel Tax Exemption?
Angel Tax Exemption is a relief granted to startups on the amount of capital raised from angel investors. The exemption is provided under Section 56(2)(viib) of the Income Tax Act, which originally covered only investments in startups by Indian residents. In 2019, the government extended the exemption to include Category II Alternative Investment Funds registered with the Securities and Exchange Board of India (SEBI) and all non-resident investors.
The exemption is applicable to startups that fulfill certain conditions such as being incorporated as a private limited company, having a turnover of less than INR 25 crore, and using the funds raised for business purposes. The aim of this exemption is to provide a boost to early-stage businesses and encourage investments from angel investors.
Requirements for Angel Tax Exemption
To be eligible for Angel Tax Exemption, a startup must meet certain criteria specified by the Department for Promotion of Industry and Internal Trade (DPIIT). These include:
1. Certification from DPIIT: The startup must be recognized as a startup by the DPIIT. It must obtain a certificate of recognition from the Inter-Ministerial Board of Certification, which is valid for 5 years.
2. Limited turnover: The startup should have a turnover of less than INR 25 crore in any previous year. This condition ensures that only small and early-stage businesses benefit from the exemption.
3. Utilization of funds: The funds received from angel investors must be utilized for the purchase of new plant and machinery, research and development, or setting up a new business.
4. Paid-up share capital and share premium: The paid-up share capital and share premium of the startup after the issue of shares should not exceed INR 25 crore.
5. Income tax return filing: The startup must file its income tax return on time every year and provide complete and accurate information about its shareholding pattern and the investments received.
Failure to meet any of these conditions can make a startup ineligible for Angel Tax Exemption. It is important for startups to maintain meticulous records and comply with all the requirements to avoid any hassles with the tax authorities.
Practical Examples
Let us understand the implications of Angel Tax Exemption through some practical examples:
1. A startup incorporated in 2017 raises funds from an Indian angel investor in 2019. If the startup fulfills all the criteria mentioned above, it can avail of Angel Tax Exemption on the funds raised.
2. An Indian startup that is recognized by the DPIIT receives angel investment in 2019 from a non-resident investor. Even though the startup does not fall under the “eligible business category” as per the Exchange Control Regulations, it can still avail of Angel Tax Exemption.
Angel Tax Exemption has been a game-changer for many startups in India. It has encouraged more investors to take a risk and invest in early-stage businesses, which in turn has fueled growth and innovation in the startup ecosystem. However, startups must ensure that they comply with all the requirements and maintain proper records to avail of this exemption.
Conclusion
In conclusion, Angel Tax Exemption is a significant step taken by the Indian government to support startups and promote entrepreneurship. It provides a much-needed relief to early-stage businesses and encourages more investments from angel investors. However, it is crucial for startups to fulfill all the requirements and maintain proper records to avail of this exemption. With the right approach and compliance, this exemption can serve as a catalyst for the growth of the startup ecosystem in India.