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What is

Angel tax?

The purpose of this document is to highlight the
direct tax implications particular to the startup ecosystem.

Angel tax

Applicability

  • Applicable on private limited companies and unlisted public limited companies, where less than 50% of the voting power is held by the government or a corporation established by a Central, State or Provincial Act.

Trigger point

  • Such company receives any consideration for issue of shares that exceeds the face value from any person, being a tax resident of India.

Consequence

  • Taxable in the hands of such company.

What is taxable?

  • Aggregate consideration which exceeds the FMV

Non-applicability of this section

  • If received by VC undertaking from:
  • a VC company, or
  • a VC fund, or
  • AIF (Category I & II)
  • If received by a recognized startup company subject to fulfillment of prescribed conditions (discussed in the ensuing section)

Determination of FMV

 

Higher of:

  • As determined under Rule 11UA(2) of the IT Rules (see below);
  • Book value of its assets on the date of issue of shares as may be substantiated by the company to the satisfaction of the Assessing Officer.

Calculation under Rule 11UA(2) of the IT Rules

At the option of assessee
  • NAV, or
  • DCF value determined by a merchant banker.

As on date on which consideration received by the assessee

Who can avail
Angel tax exemption?

Angel Tax Exemption*

  • A startup shall be eligible for exemption from applicability of section 56(2)(viib) if it fulfils the following conditions:
  • It is a DPIIT-recognized startup
  • Aggregate paid up share capital + share premium (after issue or proposed issue of share, if any) - Up to INR 25 crores

Following persons shall not be included for calculating the share capital and share premium amount:

  • a non-resident; or
  • a venture capital company or a venture capital fund; or
  • specified company**
  • Exemption available if funds are utilized for legit business purposes and not for acquiring specific assets.
  • It has not invested in any of the specified assets for 7 years from the date of latest financial year in which shares are issued at premium. The list of specified assets includes:
  • Residential house unless the startup is in that business and uses it for the purposes of renting or held by it as stock-in-trade;
  • Any land or building, or both (not being a residential house) unless occupied by the startup for carrying out its business or used by it for purposes of renting or held by it as stock-in trade, in the ordinary course of business;
  • Loans and advances, other than loans or advances extended in the ordinary course of business by the startup where the lending of money is substantial part of its business;
  • Capital contribution made to any other entity;
  • Shares and securities;
  • A motor vehicle, aircraft, yacht or any other mode of transport, the actual cost of which exceeds INR 10 Lakh, unless it is held by the startup for the purpose of plying, hiring, leasing or as stock-in-trade, in the ordinary course of business;
  • Jewelry other than that held by the startup as stock-in-trade in the ordinary course of business;
  • Any other asset including drawing, paintings, sculptures, etc.

* (As per Gazette Notification No. 127 (E) dated 19 February 2019 issued by the DPIIT)
** Specified company – Company whose shares are frequently traded within the meaning of SEBI Regulations AND whose net worth as on 31st March of preceding FY exceeds INR 100 crore Cor turnover for preceding FY exceeds INR 250 crore.

How to avail
Angel tax exemption?

Procedure
to apply for Angel tax exemption

  • A startup is required to file a declaration under Form – 2 with the DPIIT to certify and declare that all the prescribed conditions to avail this angel tax exemption have been duly fulfilled.
  • Declaration is required on the letterhead of the startup company
  • Declaration is required to be signed by a person who is authorized to verify the return of income under the Act.
  • Following particulars are required in the declaration form:
  • Name, PAN and designation of the person authorizing the declaration form
  • PAN of the startup company
  • DPIIT registration number
The DPIIT on receiving the same shall forward it to the CBDT.

Revocation of Angel tax exemption

  • Any false declaration under Form – 2 may retrospectively revoke the angel tax exemption.
  • Any investment in the restricted assets within 7 years from the latest FY in which the shares are issued at premium.

Time limit for filing declaration to avail exemption

Anytime irrespective of the dates on which shares are issued by the Startup from the date of its incorporation, except for the shares issued in respect of which an addition under section 56(2)(viib) of the Act has been made in an assessment order made under the Act before the date of issue of the notification.

Key Takeaway

Angel tax exemption is a welcome step given that there was an unnecessary litigation at this front. However, the conditions of specified assets are too rigid, especially the restriction on any startup to make capital contribution in any other entity. In short, it does not allow holding subsidiary structure for a startup. Therefore, any similar existing structure requires a revisit from angel tax perspective.