The tax exemption is meant for small start-ups as the paid up capital and the share premium of the beneficiary start-up cannot exceed Rs10 crores after the share issue. Photo: Mint
The tax exemption is meant for small start-ups as the paid up capital and the share premium of the beneficiary start-up cannot exceed Rs10 crores after the share issue. Photo: Mint

Start-ups spared of tax on angel investment above fair valuation

The notification said start-ups approved by an inter-ministerial panel are exempted from the tax which is levied on firms issuing shares to investors above their fair value, treating it as income from other sources

New Delhi: The Income Tax Department has exempted from tax the investments that small start-ups receive from angel investors above their fair valuation.

A notification from the department dated 24 May said start-ups approved by an inter-ministerial panel are exempted from the tax which is levied on companies issuing shares to investors above their fair value, treating it as income from other sources.

To be sure, this exemption is already available to investments from registered venture capital funds (VCFs) and foreign investors and the latest notification extends it to angel investors—typically, high net worth individuals—too subject to riders specified in an 11 April notification issued by the Department of Industrial Policy and Promotion (DIPP).

The riders specify that the exemption is meant for small start-ups as the paid up capital and the share premium of the beneficiary start-up cannot exceed Rs10 crores after the share issue. Also, the angel investor should have had Rs25 lakh average income in the preceding three years or Rs2 crore net worth at the end of the previous financial year. Matured start-ups issuing shares to angel investors at a price above their fair value will continue to attract tax, explained Amit Maheshwari, partner, Ashok Maheshwary and Associates LLP.

Separately, the tax department also notified a change in rules to exclude chartered accountants as eligible valuers for assessing the fair valuation of the enterprise, leaving the task exclusively to merchant banks. This is likely to irk chartered accountants. The provision to tax the premium received by companies in excess of fair valuation is meant to curb corruption as this has been the standard practice among corrupt politicians to accept bribe. Exemption to this rule has been given to start-ups to prevent it from adversely affecting the financing requirement of genuine start-ups.

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