FM announces relief from 'Angel tax' scrutiny for start-ups

Last Updated: Fri, Jul 05, 2019 16:35 hrs

New Delhi: In a huge relief for the start-ups community, Finance Minister Nirmala Sitharaman on Friday said the start-ups and their investors who file requisite declarations and provide information in their returns will not be subjected to any kind of angel tax scrutiny.

"The issue of establishing identity of the investor and source of his funds will be resolved by putting in place a mechanism of e-verification. With this, funds raised by start-ups will not require any kind of scrutiny from the Income Tax Department," said Sitharaman while presenting her maiden Union Budget.

Introduced in 2012 by the then United Progressive Alliance (UPA) government, angel tax received widespread criticism from the start-ups community as some of them began receiving I-T notices for non-payment of dues.

"Start-ups in India are taking firm roots and their continued growth needs to be encouraged," stressed the finance minister, adding they will not be subjected to any kind of scrutiny in respect of valuations of share premiums.

In addition, she said, special administrative arrangements would be made by the Central Board of Direct Taxes (CBDT) for pending assessments of start-ups and redressal of their grievances.

"It will be ensured that no inquiry or verification in such cases can be carried out by the Assessing Officer without obtaining approval of his supervisory officer," she noted.

At present, start-ups are not required to justify fair market value of their shares issued to certain investors including Category-I Alternative Investment Funds (AIF).

"I propose to extend this benefit to Category-II Alternative Investment Funds also. Therefore, valuation of shares issued to these funds shall be beyond the scope of income tax scrutiny," said Sitharaman.

She also proposed to relax some of the conditions for carry forward and set off of losses in the case of start-ups.

The finance minister also announced to start a television programme within the DD bouquet of channels exclusively for start-ups.

"This shall serve as a platform for promoting start-ups, discussing issues affecting their growth, matchmaking with venture capitalists and for funding and tax planning. This channel shall be designed and executed by start-ups themselves," said Sitharaman.

Announcing more incentives for start-ups, she said: "The condition for carry forward and set off of losses in cases of eligible start-ups is proposed to be relaxed enabling them to carry forward their losses on satisfaction of any one of the two conditions, i.e. continuity of 51 per cent shareholding/voting power or continuity of 100 per cent of original shareholders.

"Further, the provision which allows exemption of capital gains from sale of residential property on investment of net consideration in equity shares of eligible start-up shall be extended by two years".

The condition of minimum holding of 50 per cent of share capital or voting rights in the start-up was proposed to be relaxed to 25 per cent.

Here are opinions from some of the business and startup community leaders on the budget:

Vishal Gondal, CEO and Founder GOQii
"The Budget 2019 is paving way for a brighter future for India's startup ecosystem with easing the angel tax, ensuring more entrepreneurs jump in to the startup bandwagon. The idea to have a separate channel for startups under the aegis of Doordarshan will disseminate critical information in the industry on a real-time basis to budding entrepreneurs in the tier II and III markets particularly, enabling these entrepreneurs to help realise the Government of India's vision of becoming a USD $3 trillion economy this year."

Neel Juriasingani, CEO " Co-founder, Datacultr
"Startups in the technology industry can take clues out of the various topics touched upon in this budget, to understand the direction and focus. The vision of the government to train 10 million industry-relevant skills such as Artifical Intelligence, Big Data, and IoT opens up great avenues for companies " start-ups like us in the space, as well as for those working on building digital infrastructure of a connected India. Besides, other measures announced such as ease of angel tax will make it smoother for investors to put in their money in startups."

Vinamra Pandiya, Founder " CEO,
"This year's Union Budget really stood out for entrepreneurs and MSMEs. The announcements that were made today will not only help MSMEs but also budding entrepreneurs. Initial clarity on Angel Tax issue, no scrutiny on Startup market valuation and e-verification for establishing investor identity is laudable, however, we have seen such announcements in the past. We have to see how CBDT and AO's interpret this and help 100s of startups already reeling under its after effects. While the intent is welcome, we will hold our horses before corking the bubbly.

With reforms such as getting loans in 59 minutes of up to 1 crore, starting business has become easier, threshold for applicability of lower corporate tax rate of 25% increased from 250 crores to 400 crores has been a good move by the government to increase the tax base and compliance. One announcement that really stood out in this budget was the announcement of dedicated channel for startups. This will really help spread the startup culture in Tier 2 and Tier 3 cities. With the help of such initiatives, startups will be able to meet with different venture capitalists under one roof. As the finance minister rightly pointed out, in just a matter of 2 years we have seen an emergence of over 300 entrepreneurs, we can safely say that India has become the hub for startups."

Somesh Misra, VP Operations, Deskera
"With India having more than 50 million SMEs, the 2019 budget seems incredibly promising for further augmenting their growth and development. Also, with the Government announcing the establishment of an online portal to enable filling of bills for MSMEs, this has the potential to materially impact the SME landscape in India. Additionally, by offering credit of up to Rs. 1 crore within an hour for SMEs, will enable businesses to increase investment in R"D, upskilling and bringing in technological innovations to work. Government's efforts to improve the skills of our youth in newer areas such as Artificial Intelligence, Big Data and Robotics will definitely help the Indian IT services sector to ride on the digital transformation wave. Lastly, the announcement of easing angel tax on start-ups has also given relief to the startup community. All of these initiatives will truly be a game changer for the Indian economy and ensure the country achieves its target of becoming a $5 trillion economy by 2025."

Bhaskar Majumdar, Managing Partner, Unicorn India Ventures
"This Budget has been a good budget for the startup community. The aspect of 'Angel tax' has been a long standing demand of the industry and we welcome this move. Launching ASPIRE incubators in tier 2 and 3 cities and the push to the digital economy by removing charges on digital transactions and surcharge on companies withdrawing more than a crore every year will have a positive impact on accelerating digital economy and bringing more transparency in transactional data. Bharat Net focus on tier 2 and 3 cities will also boost the digital economy. I think the two aspects that may have gone unnoticed are the Social stock exchange through which social entrepreneurs will be able to raise money and global investors meet which the govt is planning will obviously boost early stage investment ecosystem here.

Anand Naik, Co-founder CEO, Sequretek
"Really appreciate the continued attention given by this government to startups and SME sector. The startup initiatives outlined in this budget are very encouraging and will further foster the innovation environment in India. Ease in accounting for Angel tax, incubators and removal of charges for cashless transactions are all very positive steps to create more start ups and thereby creating jobs in this sector."

Rohit Manglik, CEO, EduGorilla
"A series of incentives accorded to startups in the Union Budget is a testimony to the government's intent of fostering an enabling ecosystem to promote entrepreneurship in India. The move to set-up around 80 - livelihood business incubators" and 20 tech business incubators is commendable as it will boost entrepreneurship besides upskilling the workforce to meet demands of industry 4.0. Furthermore, the easing of Angel Tax on Start-ups and the proposal to revamp the Labour Laws will improve the Ease of Doing Business in the Indian economy. The extension of Women SHG Interest Subvention Programme will boost women entrepreneurship."

Atul Rai, CEO and Co-Founder of Staqu
"The new Government's first Union Budget has perfectly balanced all essential parameters of our economic dynamics including infrastructure enhancement, skill development, job creation, and technological advancement. This has been done while also creating favourable environment for businesses and especially, tech-centric startup. We would specifically like to highlight the Government's strong focus on the indigenous Research and Development with establishment of National Research Foundation will promote indigenous technological development, particularly around globally scalable technologies such as Artificial Intelligence, Big Data, and Robotics. We believe that this will pave the way for cutting-edge indigenous solutions and make India a technological epicenter in the international grandstand."

K Ganesh, Serial Entrepreneur " Partner - GrowthStory
"The draconian devil tax has been comprehensively addressed including some relief for pending cases that were causing lot of angst. One of the best moves is the delinking of calculation and the justification of share premium since deciding a premium is not an exact science, and it is impossible to justify. Now, only the identity of the investor and source of income needs to be proven. This is fair and a straight-forward process. Having supervisory approval of the Assessing Officer is welcome as it will reduce arbitrariness and prevent unwanted harassment."

The overall tone of not being punitive but being supportive through positive steps is welcome for interest schemes for GST registered MSMEs. Credit facilities will spur more job creation at the grassroot level.

Nudging people to move towards desirable behaviour through positive reinforcements such as electric vehicle schemes is welcome, as compared to just making traditional vehicles costlier or punitive measures. TDS on cash withdrawal above 1 crore will help the fintech and digital payments sector and make the overall financial system more inclusive and efficient."

Anand Ramachandran, CFO, Ingenico ePayments:
"This budget is a good synthesis of continuing the Digital India mission with improving efficiency. The proposal to set up a payment platform for MSMEs for online presentation and payment of invoices will not only help cash flow but also give a huge boost to Digital Payments, as the entire supply chain will now be incentivized to go Digital. Also the platform opens up possibilities for accessing lower cost funding. The other two moves for no MDR for businesses above 50 crores turnover and 2% TDS on cash withdrawals more than 1 crore per annum are a further nudge to industry to lower the entry barrier to Digital Payments and disincentivize use of cash. Overall, a positive budget for the payments industry."

Bhavin Turakhia, co-founder and CEO, Zeta.
"The Budget 2019 has witnessed giant leaps towards building a cashless economy. One of the biggest steps is developing the country's first payment system (One Nation-One Card)for transport which will be a holistic card for citizens for digital payments across travel, shopping etc. The decision of not charging customers for digital payments and waiving off the MDR charges is also a push in the right direction to encourage every citizen to carry out digital transactions and make India a less cash economy. Additionally, the Government of India has made a much-needed move for working professionals by bringing in ease and convenience by proposing to make PAN and Aadhaar interchangeable along with making them available with pre-filled tax returns which aims to reduce the time taken to file a tax return as well as enable accurate reporting of income and taxes. The digital push also reflects in the tax filing process as with the launch of a scheme of faceless assessment in electronic mode involving no human interface. The government has introduced several measure that are in line with the 'Digital India' vision and we welcome the same."