With the latest procedural changes to avail ‘angel tax’ exemption, the Centre has done a fine balancing act in assuaging the concerns of start-ups while at the same time ensuring that they don’t end up as a conduit for money laundering.
However, one can’t simply dub the latest measures as only wins for the start-up community as there are new issues that have cropped up to the disadvantage of angel investors, say tax experts.
No merchant banker
If there is one procedural change that has warmed the hearts of the start-up community, it is the Modi administration’s move to do away with the requirement of obtaining share valuation reports from a merchant banker.
Hitherto, merchant banker report specifying the ‘fair market value’ of shares was mandatory for seeking ‘angel tax’ exemption.
But now start-ups need to only justify the valuation of shares with appropriate supporting documents.
“Removing the merchant banker is very good because that was an additional high-cost time-consuming step for start-ups. Valuation in any case is done by the investor as he puts his money and negotiates his hearts. There was no need for a merchant banker to come in,” Sunil K Goyal, Founder & CEO, YourNest, an early stage venture capital fund, told BusinessLine.
This will obviate the need for an extra effort in getting a merchant banker report and one could just go with a CA report as anyway mandated under company law for any private placement.
Secondly, now the CBDT and not the inter-ministerial board (IMB) will give the approval for ‘angel tax’ exemption. Start-ups have been lobbying hard that the decision to grant ‘angel tax’ exemption should rest only with CBDT.
Rakesh Nangia, Managing Partner, Nangia Advisors LLP, said the latest Government move has been a “mixed bag” for start-ups as it comprises some relaxations and at the same time has introduced certain riders for availing ‘angel tax’ exemption.
Aseem Chawla, Managing Partner, ASC Legal, a law firm, highlighted that the latest DIPP notification acknowledges the unintended consequences of Section 56 (2)(viib) of income tax law (popularly referred as ‘Angel tax’ provision).
“Though there is some respite, the thresholds and departmental bureaucratic processes do not provide a complete relief,” Chawla said. Also, the notification bars situations where assessment order has been passed by income tax authorities, he said.
Amit Maheshwari, Partner, Ashok Maheshwary & Associates LLP, a CA firm, said the relaxation would have limited retrospective application. “Majority of start-ups facing tax litigation are either in appeal at various forums or have got final orders and will appeal now. They have not been allowed to avail this exemption and hence will continue to litigate,” he said.
New pain point
A new pain point relates to the eligibility criteria for investors. Earlier, the investors/ proposed investors had to satisfy any one threshold, that is, either returned income criteria or networth criteria to apply for approval. Now, the investor has to satisfy both the threshold in order to be eligible to apply for approval. Also, these threshold limits have also been revised.
Now, the proposed investor will be required to have returned income of ₹50 lakh during the year immediately preceding the financial year in which the investment is proposed. Earlier it was a average of ₹25 lakh in the three proceeding financial years.
Also, net worth on the last day of the financial year preceding the year of proposed investment has to be ₹2 crore or the amount of proposed investment, whichever is higher. Earlier, this threshold was fixed at ₹2 crore, irrespective of the proposed investment.
With the thresholds of income and net worth of investors increased, only investments by large investors would qualify for exemption from ‘angel tax’. “This may discourage start-ups from taking investment from smaller angel investors, thereby limiting their window of prospective investors,” Nangia said.
via Angel tax: Centre’s measures are a ‘mixed bag’, say experts – The Hindu BusinessLine