Startups Caught In Angel Tax Net Also Getting Relief 

Startups that received angel tax notices are also getting relief after the government last month tweaked rules amid fears that the levy could deter early-stage investors from making bets on new ventures.

Sreejith Moolayil, co-founder of health food startup True Elements, said his venture received the exemption letter— BloombergQuint reviewed a copy. True Elements was among the 150 ventures that got the notices, and they were worried that the benefit wouldn't be available to them as the changes to the rules applied prospectively.

Around 90 startups have now received the exemption letter from the tax department, Moolayil said, adding that the solution came after 18 months of consultation with the government. “We can now go back and build business without worrying about taxmen.”

Easier rules followed concerns that tax on angel investments could dry early-stage funding that is necessary to build a startup ecosystem, leading to exodus of new ventures from India. Now, registered startups are exempted from tax on funding of up to Rs 25 crore compared with the existing limit of Rs 10 crore under section 56 (2)(vii) of the Income Tax Act, according to the changes notified by the Central Board of Direct Taxes. A company will be considered a startup for 10 years from the date of incorporation instead of seven, and the maximum turnover to be called a startup was raised from Rs 25 crore to Rs 100 crore.

About 166 startups had submitted Form 2 on Feb. 27 to seek exemption under the new rules, Geetika Dayal, executive director of TiE Delhi, told BloombergQuint over the phone. The majority of them had received tax notices over angel funding. Nearly 93 of the startups had received the acknowledgement on March 15, Dayal said, adding that the rest are yet to get it as their forms were either incomplete or had errors.

According to Moolayil, all the startups that had received the acknowledgment got the exemption letters. BloombergQuint wasn't immediately able to independently verify it with other ventures.

Meanwhile, the government is also planning to set up a new category of “accredited” investors that will include high-net-worth individuals and unlisted companies, among others, which can make tax-free investments in startups even above the Rs 25-crore cap.

As of now, investments by non-residents, category-I alternate investment funds comprising infrastructure, social venture, venture capital and SME funds, and listed companies with a net worth of Rs 100 crore or turnover of at least Rs 250 crore are exempted under the Rs 25-crore cap.