Gone are days when we use to strive to stand in the lines for the payment of the bills in the scorching heat. Nowadays, the payment of the bill is just one click away instead of few doors away. The world is developing and so are the people and their living standard. In the world full of competition, India has been trying to leave its dent and become the developed nation from the developing nation. Since the day, Narendra Modi has taken the charge of the office, he has been trying with his heart and soul to make India, a developed country and increase the low GDP of the country. He has been coming up with numerous schemes and ideas. One of such idea is ‘Start-up India’. And there, Narendra Modi got successful in catching the nerves.

START-UP INDIA:

According to Narendra Modi “Startup India is the revolutionary scheme which is initiated by the government to help the people who wish to start their own business. The people having ideas and capabilities, will be supported by the government to make sure that they can implement their ideas and grow. The success of this scheme is eventually going to make India, a better economy and a strong nation, which everyone desires for.”

In a country like India, there is presence of immense talent, skills, intellectual and hard work but absence of funds. For starting any start-up we need huge amount of funds, as we all are aware, start-up do not get the funds easily. Some of the people are successful at impressing the investors to invest in their start-ups, whereas some fail at it and fold their dreams backed with immense talent and start working in an MNC or any other company.

There with the death of the idea and dreams dies certain portion of GDP. In the era of 21st century, people are shifting from mediocre thought of working in a company to build something of their own. Rather than investing 100% for others, they have started investing 100% for themselves. Narendra Modi has realized this fact that if the government gives the helping hand to the start-ups, they will be watering the tree.

WHAT IS “START-UP INDIA”?

The Start-Up India is the initiative made by the government to build the Startups and nurture the innovation with which the government plans to empower the Startup ventures so as to boost the entrepreneurship, employment and the economic growth across the India. Startup India is about creating prosperity and boosting the entrepreneurship and the economic development. The scheme ensures to encourage the people who have the potential to innovate and start their own business with the multiple level of proactive support and the incentives. The Department of the Industrial Policy and Promotion (DIPP) has organized the “19-Point Action Plan”, which focusses on the promoting the growth by removing the hindrances by the way of:

  • Handholding and Simplification
  • Funding support and Incentives
  • Industry-Academia Partnership and Incubation

DEFINITION OF STARTUP?

The definition of the startups for purpose of the Government Scheme is,

The Startup means an entity:

  • Incorporated and registered in India not prior to ten years.
  • With an annual turnover not exceeding INR 25 crore in any preceding year
  • Working towards innovation, development, deployment or commercialization of a new product, processes or services driven by the technology or the intellectual property.

The entity shall be a startup if:

  • It is forms by splitting up, or reconstruction, of a business already in existence
  • Its turnover for the previous financial year has exceeded INR 25 crore
  • It had completed 10 years from the date of the incorporation/registration (earlier it was 5 years).

The startup defined under the schemes are entitled to the tax benefits only if the startup has obtained the certification from the Inter-Ministerial Board, set up for such purpose.

ANGEL TAX:

Angel Tax has derived its roots from the section 56(2) (viib) of the Income Tax Act, 1962. The Angel Tax was introduced through the Finance Act of 2012, which aims at taxing any investment at 30% that any unlisted Indian Company receives and is valued above the fair market value by treating it as income. Investment that is in the excess of fair value is characterized as ‘Income from other sources’ and the tax imposed on such other income is known as Angel Tax. The Angel Tax is levied on the capital that is raised through issue of shares by the unlisted companies from an Indian Investment where the share price of issued shares is in excess of the fair market value of the company. The excess realization is taxed considering it as an income of the individual investor.

After the notification of May 24th, 2018, issued by the Department for Promotion of Industry and Internal Trade (DPIIT), the Central Board of Direct Taxes (CBDT), has exempted the angel tax investors form the angel tax if they, met certain terms and conditions mentioned in the notification. Despite of the notification, there was hustle and various challenges are being faced by the startups to exercise the exemption mentioned in the notification. To which the government have decided to set up the five-member working committee for looking into the angel tax issue, analyze the issues and come up with the guidelines. The government has some proposed reforms, they are as follows:

  • Raising the limit of the start-up’s aggregate amount of paid-up share capital and share premium after the proposed issue of share to Rs. 25 crore.
  • To amend the definition of the startups and include the companies which have been operating since 10 years.

The committee accepted the proposed reforms and brought the changes accordingly. It brought the change in the definition of startups and the angel tax exemption limits. It cleared the way for many of the startups to get the exemptions granted under the angel tax. With the issuance of the notification, the government gave the assurance of their support with the domestic investors and the startups.

QUINTESSENTIALS OF ANGEL EXEMPTIONS:

The Angel Tax is imposed only on the investors who are the resident of India, which means it does not includes the investment made by the venture capital funds and the non-resident of India. There might be many overseas investors and the venture capital to whom the startup founders look upon to invest in their ideas. The removal of tax from those budding startups can encourage more local investors to participate and help a newbie entrepreneur to lead to the road of success and make a pitch to the crorepati next door. The government with this idea, has exempted the investments made by the domestic investors in the companies (startups) which gets the approval by the inter-ministerial panel to be exempted from the Angel tax. There are few criteria to fall into the bucket of the exemption from the Angel-Tax, they are as follows:

  • The paid-up capital and the share premium of the startups shall not exceed Rs. 25 crore after issuing of the share.
  • The investor to invest in the startup should have the minimum net worth of Rs 2 crore and should not have the average income less than Rs. 500 in the last 3 financial years.
  • The startups should procure its fair market value to be certified by a merchant banker.
  • The startups is required to receive the approval from 8 member inter-ministerial board for exercising the tax exemption under Angel-Tax.

The government through one of its recent notification have removed the last two requirements to be complied with in order to have the simplified compliance procedure. The eligible startups can make a request to the Department of Industrial Policy & Promotion (DIPP), now re-named as Department for Promotion of Industry and Internal Trade (DPIIT) for the angel tax exemption by filing an application. The DIPP-recognized application will be forwarded by DIPP to CBDT (Central Board of Direct Tax) with the required documents of the startups. The CBDT has the discretion of accepting or declining the application within 45 days from the day of receipt of such application.

ANY DRAWBACKS OF ANGEL TAX?

  1. The valuation of the startups on the basis of their assets alone is not easy. Neither it is easy to arrive at the ‘fair-value’ of the startups, based on the discounted cash-flows. This makes the startups valuated subjectively and makes its sky-high for some and fair for the others.
  2. The angel tax was introduced as an anti-abuse provision in the 2012 budget for curbing the attempts to launder undisclosed income, but now the relaxation are given to nurture the innovative firms and are signaling the deviation from its objective.
  3. The investors in countries like US are offered the tax benefits while funding the small companies. The angel investors can save the tax by re-investing the gain from the small business in another venture and utilize in funding the companies, which will ultimately increase the GDP of the country and will help the investor to have some illustrious investments. Whereas in India, the element of suspicious is always there over the startups investment. India should also give some tax benefits to the person investing in the startups.
  4. There exists no definitive or objective way of measuring the ‘fair market value’ of a startup. It have been claimed by several startups that becomes very difficult for them to justify the higher valuation of the startups to the tax official as the tax official assess the value based on the net asset value at one point.

In the month of December, many startups were hit with the notices issued by the CBDT in relation to the angel rounds raised by the startups few years ago. Since then there have been hustle amongst the people. The people have been in a dilemma since the 2018 budget, because of the anticipation of the abolition of the angel tax. Instead of the abolition the Finance Minister, Mr. Arun Jaitley stated the vague speech regarding the exemptions that the government will be granting to the startups. It has been one year since then, even after the Budget of 2019, the government has not abolished the angel tax. It sounds like an anomaly, at first place government wants the people of the country to invest and increase the GDP by the flow of money and on the second place they are not giving any perks to the people taking an initiative to make the government’s motive as their motive. If the government abolishes the angel tax, it would help the country to have more number of startups. There are still many complications regarding the compliances and many of the people are not able to get the benefits of the angel tax.

The domestic investors have started to take a step back from investing in the startups. Many startups have been receiving the notices from the tax authorities to pay the taxes, although they are getting solved by the tax department and the startups are being later on relaxed from paying the tax. But in the country like India, it is very new and difficult for the people to invest in something which may or may not excel in future. And if the government and the tax authorities start being harsh and non-diligent towards them the domestic investors will start getting the blanket-fever from investing in the startups.

The investment in the startups and its growth in the country have started being holding the immense importance when it comes to the development of the country. The country will be a developed country not only when the big and illustrious companies will keep excelling, but also when the other upraising sectors, like entrepreneurship, will start excelling. It has been also recognized worldwide that, now the time has come to focus on the startups. This may reducing the gap between the rich and poor class of people. It will decentralize the wealth, which further on will help in achieving the Sustainable Development Goals. India being a developing country should focus on the sustainable development goals and encourage the schemes and ideas which decentralizes the wealth. And according to the author the government should not only abolish the angel tax, but should also provide the domestic investors of the startups with some tax-benefits, which will in turn help in attracting more investors. When there will be more investors, the firm may excel more, the firm may generate more income, income generated from the firm will be taxed, and that will directly increase the tax deposit with the government.

“FOCUS ON GROWTH AND NOT THE TAX FROTH”

 -Shreya Bhargava

(Author Shreya Bhargava is student of the 4th year B.Com.LL.B (Hons.) in taxation laws at the University of Petroleum and Energy Studies, Dehradun. 

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Qualification: LL.B / Advocate
Company: Clifford Chance
Location: Delhi, New Delhi, IN
Member Since: 18 Apr 2019 | Total Posts: 3
Hello, people over there, it's very difficult for me to explain what I possess within 1000 characters because I have lived for more than 1000 days and each day, I inculcate something new that makes me the person who I am right now. But to summarise me in a few words, I would describe myself as a per View Full Profile

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One Comment

  1. Vijaya says:

    Well nicely written article.Concept of Angel fund and it exempt and benefit were explained in a very simple and layman term.Agree to Shreya’s thought that Angel fund should be exempted from tax which in turn will encourage the startups.

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