Wednesday, January 16, 2019

What has Changed for Angel Tax Exemption as per DIPP Notification.

The good news for all recognized startups has arrived ! DIPP has just notified an amendment to its earlier Notification  No. G.S.R.  364(E)dated April 11, 2018. under which  the procedure for startups to seek income tax exemption on investments from angel funds was fixed. Now the Para 4 of the said notification has been substituted  and a new procedure an form ha been prescribed for approval for the purposes of clause (viib) of sub-section (2) of section 56 of the Act.

What is the new procedure of claiming exemption from rigor of section 56(2)(viib)?

The startup needs to apply before DIPP for approval of exemptions from application of section 56(2)(viib) of the Income Tax Act. The DIPP is only forwarding authority . The new rule as per notification dated 16.01.2018 is as under  :
  1. It applies to startups recognized by Govt. under para (iii) (a) of notification 364(E)dated April 11, 2018
  2.  The new rule for exemption applies on a startup company whose paid up share capitlal including premium is upto Rs 10 Crore ( 100 Million)
  3. The investor/ proposed investor should have 
    1.  returned income of Rs. 50 lakh or more for the financial year preceding the year of investment/proposed investment;  and 
    2. net worth exceeding  Rs. 2 crore or the amount of investment made/proposed to be made in the startup, whichever is higher, as on the last date of the financial year preceding the year of investment/proposed investment.So if investor wants to invest Rs 1 Crore ( 10 million) in FY 2019-20, then his/her/its net worth should be exceeding  Rs 20 million by 31/03/2019 .

How the application should be made ?

  1. The startup desirous of getting exemption need to apply in Form-2 prescribed  through new notification. The prescribed documents needs to be attached . 
  2. DIPP will forward the application to CBDT which approve or reject the application with 45 days of receipt of the forwarded application.

Relevant extract of the Notification dated 16.01.2019 given below for ready reference


2. Para 4 of the Notification shall be read as under: 

Approval for the purposes of clause (viib) of sub-section (2) of section 56 of the Act.
4. (1) A Startup which is recognised by DIPP under para 2(iii) (a) shall be eligible to apply for approval for the purposes of  clause (viib) of sub-section (2) to section 56 of the Act for the shares already issued or proposed to be issued if the following conditions are fulfilled—

(i) aggregate amount of paid up share capital and share premium of the startup after the proposed issue of share, if any, does not exceed ten crore rupees;

(ii) The investor/ proposed investor shall have — (a) returned income of Rs. 50 lakh or more for the financial year preceding the year of investment/proposed investment;  and (b) net worth exceeding  Rs. 2 crore or the amount of investment made/proposed to be made in the startup, whichever is higher, as on the last date of the financial year preceding the year of investment/proposed investment.

(2) (i) Application for approval under this para shall be made in Form-2 to DIPP and shall be accompanied by the documents specified therein: 
Provided that in case the approval is requested for shares already issued by the Startup, no application shall be made if assessment order has been passed by assessing officer for the relevant financial year. 
(ii) The application of the recognised startup shall be transmitted by DIPP to CBDT with the necessary documents.
(3) The CBDT, within a period of 45 days from the date of receipt of application from DIPP may grant approval to the Startup for the purposes of clause (viib) of sub-section (2) of section 56 of the Act or decline to grant such approval. 3. In para 5 (1) and 5 (2) after word ‘Board’ words ‘or CBDT’ are added.
4. Para 6 shall read as under:
6. This Notification shall come into effect on the date of its publication in the Official Gazette. The Government will carry out a review of this Notification before 31.03.2021

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