Home >market >stock-market-news >Angel tax: bull’s eye or missed goal

Recent changes made by the Indian government are welcome, however, more needs to be done.

‘Start-up India’ has been one of the major initiatives of the current government as part of its flagship ‘Make in India’ programme. Since its launch in 2016, the government has been proactive in seeking stakeholder suggestions and making necessary policy changes. Providing tax-incentives to start-ups during the initial years of operation to support entrepreneurs under this initiative has been much applauded.

In our earlier article, we had highlighted that the taxation on issue of shares at more than the ‘fair market value’ (FMV) (commonly known as angel tax) remained an irritant for start-ups and had requested the government to address this concern.

In 2016, the government had notified that the angel tax provisions shall not apply to investments made in eligible start-ups fulfilling conditions prescribed by the Department of Industrial Policy and Promotion (DIPP).

The next notification in 2017 had specified incorporation of a start-up on or after 1 April 2016 as pre-condition for availing ‘tax benefits’. The term ‘tax benefit’ had not been defined and this gave rise to a debate as to whether ‘tax benefit’ covered both tax holiday and exclusion from angel tax provisions.

One view was that ‘tax benefit’ referred to only availing tax holiday and a start-up incorporated before 1 April 2016 would continue to be eligible for exclusion from angel tax provisions and it did not require an ‘inter-ministerial board’ (IMB) approval.

The recently issued notification, which is effective 11 April and supersedes the 2017 notification, does not require start-ups to be incorporated on or after 1 April 2016 for the purpose of exclusion from angel tax provisions. However, it mandates an IMB approval. Thus, clarity has been provided on the process for seeking exclusion from angel tax on a going forward basis. However, the debate on the requirements of obtaining IMB approval prior to the 2018 notification has not been addressed. A clarification in this regard would be welcome.

Interestingly, the government has directed that the demand raised by the revenue department on disputes pertaining to angel tax should not be enforced. However, it remains to be seen whether in light of this notification, the revenue department initiates any action to press the tax demands raised on start-ups on account of past angel investments.

The recent 2018 notification has introduced procedural guidelines to be followed to avail a tax holiday and seek exclusion from angel tax by start-ups. In the context of exclusion of start-ups from fair valuation rules for issue of shares, DIPP has notified twofold conditions to be fulfilled for obtaining IMB approval.

First, the aggregate amount of paid-up share capital and share premium of the start-up after the proposed issue of shares shall not be more than Rs10 crore.

Second, the investor who proposes to subscribe to the issue of shares of a start-up should have an average ‘returned income’ of Rs25 lakh or more in the preceding three financial years or a net worth of Rs2 crore or more on the last day of the preceding financial year.

Also, the start-ups are required to obtain a report from a merchant banker specifying the FMV of shares.

While the above conditions for obtaining IMB approval intend to smoothen the tax exemption process for start-ups, it may still limit the benefit due to low thresholds.

New-age start-ups with a requirement of more than Rs10 crore in paid-up share capital and share premium are likely to be excluded from availing this benefit. Thus, to avail this benefit, they may have to evaluate the option of debt financing for fund requirements in excess of the aforesaid amount.

In respect of the investors, the ‘returned income’ has not been defined and it is likely to exclude exempt income in their hands such as dividends, share of profits from an Indian partnership firm, prior long-term capital gains from equity shares/ equity mutual funds, etc. In many cases, such exempt income could be the very source of funds being invested by an angel investor, thereby putting an artificial restriction on their capacity to invest into start-ups.

An entrepreneur who earlier had to convince only the investor about his/her idea and consequential business valuation will now have to get approval from an eight-member IMB. The notification does not provide any time frame within which such approval would be received nor does it contain any mechanism to appeal IMB’s refusal to grant approval. Though the recent notification is aimed at providing clarity on angel investments, it is hoped that an entrepreneur does not have to face bureaucratic or procedural hurdles in getting the requisite approvals.

Considering the government’s endeavor to encourage start-ups, one hopes that the issues still being faced by entrepreneurs and investors are addressed in a timely manner.


1. What is the composition of Inter-Ministerial Board (IMB)?

As per the Department of Industrial Policy and Promotion (DIPP) notification dated 11 April 2018, the Inter-Ministerial Board of Certification shall comprise members from the following eight ministries/bodies:

(i) Additional secretary, DIPP

(ii) Representative of ministry of corporate affairs

(iii) Representative of ministry of electronics and information technology

(iv)Representative of department of biotechnology

(v) Representative of department of science and technology

(vi) Representative of Central Board of Direct Taxes

(vii) Representative of Reserve Bank of India

(viii) Representative of Securities and Exchange Board of India (Sebi)

2. What are the documents to be submitted for obtaining IMB approval?

1.The application for certificate for tax holiday shall be in Form–1, accompanied with the following documents:

a. Copy of memorandum of association, LLP/partnership deed, board resolution, etc.

b. Annual accounts of the start-up for the last three financial years

c. Copies of income-tax returns for the last three financial years

2. The application for IMB approval for exclusion from angel tax provision shall be in Form–2, accompanied with the following documents:

a. Copy of memorandum of association, LLP/partnership deed, board resolution, etc., of the investor,

b. The annual accounts of the start-up from the date of its incorporation;

c. Name, PAN and address of the existing shareholders, along with their shareholding and the amount at which shares are issued to them

d. Copy of income-tax returns of the investor for the last three financial years

e. Copy of balance sheet of the investor as on the last day of the preceding financial year; and

f. Merchant banker’s report.

3. Can an entity cease to be considered as a start-up?

Yes, an entity shall cease to be a start-up on the completion of seven years from the date of its incorporation/registration or if its turnover for any previous year exceeds Rs25 crore. In respect of start-ups in the biotechnology sector, an entity shall cease to be a start-up on completion of 10 years from the date of its incorporation/registration or if its turnover for any previous year exceeds Rs25 crore.*

Vikas Vasal is national leader tax–Grant Thornton India LLP. You can send your queries to vikas.vasal@in.gt.com

Rajashree Sarna and Vedika Kedia contributed to this article.

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