Start Up–Welcome relaxation – The Hindu BusinessLineQ

After much to-ing and fro-ing on the issue, the Department for Promotion of Industry and Internal Trade (DPIIT) seems to have convinced the Centre to substantially water down its April 2018 notification prescribing onerous conditions for start-ups to seek exemption from the contentious angel tax. A fresh notification has been issued this week to take the bite out of the angel tax rules which had all but dried up domestic small-ticket funding for nascent ventures. While this review is welcome, the Centre has stopped short of the truly reformative step of doing away with angel tax in its entirety.

The angel tax provision, introduced in 2012, allows the tax department to levy income tax on domestic capital contributions received by unlisted entities in excess of a fair market value determined by it, on the premise that such deals represent attempts at money laundering. Given the considerable discretionary powers that this determination of ‘fair value’ vested with the taxman, it has been subject to widespread misuse. In April 2018, the Centre issued a circular, ostensibly to help start-ups seek automatic exemptions from angel tax but ended up vastly complicating the issue. The latest notification makes it easier for genuine start-ups to avail themselves of this exemption. For one, the only two qualifications that start-ups will now need for angel tax exemptions, would be recognition by the DPIIT and the filing of a self-declaration form. Two, start-ups will be eligible to apply within the first 10 years after their incorporation, provided their turnover hasn’t exceeded ₹100 crore in any year. Earlier, they could apply only within the first 7 years and were subject to a lower turnover cap of ₹25 crore. Three, start-ups with a paid-up capital of up to ₹25 crore will now be eligible for recognition as opposed to ₹10 crore earlier. Investments from NRIs, domestic Category I AIFs and larger listed companies, already subject to onerous KYC norms, will be automatically exempt. The new rules greatly simplify life for start-ups by waiving the need for valuation certificates and doing away with case-to-case interventions by the CBDT.

To curb money-laundering through this route though, the new rules make tax exemption contingent on the start-up not routing investor money into residential property, shares, securities, vehicles/aircraft/yachts or loans or advances not used in business. While the start-up lobby seems to be unhappy with this condition, this is a reasonable stipulation to prevent abuse. Given that the new rules now grant sweeping exemptions to start-ups below a certain threshold from angel tax, the Centre needs to introspect on whether the angel tax provision serves any purpose. After all, Section 68 of the Income Tax Act which requires companies and their investors to come clean on the sources of unexplained cash credits, already serves as a deterrent against such abuse. Overall, this episode highlights the pitfalls of writing new tax laws when focussing on better enforcement of existing ones would work just as well to curb evasion.

via Welcome relaxation – The Hindu BusinessLine

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