Angel Tax Exemptions Granted to Over 8,000 Startups

Angel Tax Exemptions

Three points you will get to know in this article:

  • To avail the angel tax exemption, startups must submit Form 2 (Section 56(2)(viib)), confirming their non-investment in assets exceeding INR 10 lakh, such as land, buildings, vehicles, unless used for business-related activities.
  • As of September 26, 2023, 8,066 startups have been granted exemption from angel tax.
  • More than 10.8K DPIIT-recognized startups have sought angel tax exemption.

Since the announcement in 2019 regarding the exemption of angel tax for startups, the Department for Promotion of Industry and Internal Trade (DPIIT) revealed that 8,066 startups, officially recognized by DPIIT, have successfully secured exemption from angel tax. This information was disclosed in response to a Right to Information (RTI) request submitted by Inc42.

It is important to highlight that DPIIT and the Central Board of Direct Taxes (CBDT) jointly issued a notification on February 19, 2019. The notification stated, “All startups are now eligible for angel tax exemption, irrespective of their share premium values. However, this exemption is contingent upon the cumulative amount of paid-up share capital and share premium of the startup, following the issuance or proposed issuance of shares, not exceeding INR 25 Crores.”

To qualify for consideration, startups must complete Form 2 in accordance with DPIIT Notification No. G.S.R. 127 (E). By doing so, they confirm that their investments do not include assets such as land, buildings, or vehicles valued at more than INR 10 lakh, unless these assets are specifically used for business-related activities.

Surprisingly, many startups have not addressed this requirement. Up until June 21, 2019, only 944 startups had taken steps to apply for angel tax exemption. Out of this group, the CBDT granted exemption to 702 startups under this particular provision.

Fast forward to February 2021, and only a modest 8% (equivalent to 3,612 startups) of the 44,000 recognized startups had bothered to complete Form 2 to secure angel tax exemptions.

The DPIIT’s reply to the RTI inquiry brought to light that from February 19, 2019, to September 26, 2023, a total of 10,809 startups, recognized by DPIIT, sought exemption. Surprisingly, only 8,066 of them have successfully secured the coveted green signal for exemption.

Presently, as per the information available on the Startup India portal, India boasts a thriving community of more than 99,380 startups officially recognized by DPIIT. Consequently, the percentage of startups enjoying exemption from the angel tax stands at a consistent 8%.

According to Siddarth Pai, a partner at 3one4 Capital, compliance with the parameters outlined in Form 2 has the potential to impede the progress of startups. He shed light on concerns such as limitations on loans & advances, shares & securities, and capital contributions, all of which could pose obstacles to essential activities like mergers and acquisitions or the establishment of subsidiaries. Pai underscored the gravity of these challenges, cautioning that a breach might result in substantial fines, devouring a substantial portion—nearly 85-90%—of a startup’s capital.

“They operated with such stringent measures. If you happen to breach the rules, you’re not only liable for the taxes you owe but also subjected to a penalty, totaling twice the tax amount, coupled with interest and penalties. This could result in a significant loss, amounting to nearly 85 to 90% of your funds. Who would be willing to take such a substantial risk?” Pai emphasized.

On the 26th of September 2023, the Income Tax department issued a notification that brought about amendments to Rule 11 UA. The purpose was to provide startups and investors with increased clarity and flexibility through the introduction of various valuation methods. Despite the notification addressing specific concerns, it fell short of resolving the central issue of disputes arising from the disparities between projected and actual valuations.

the journey of startups seeking angel tax exemption in India reflects both progress and challenges. With over 8,000 startups successfully securing exemption since the 2019 announcement, there’s evident growth. However, the low percentage of startups (8%) opting for this benefit raises questions about awareness or the perceived hurdles of compliance. Siddarth Pai’s insights shed light on the potential hindrances, emphasizing the risk of substantial loss for startups not navigating the stringent measures carefully. While recent amendments aim to enhance clarity, the unresolved issue of valuation disparities remains a concern, signaling a need for further refinement in the regulatory landscape.

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