Angel Tax provisions relaxed for startups companies for making application for exemption-u/s 56(2)(viib)

Angel Tax provisions relaxed for startups. Companies with paid up share capital and share premium after the proposed issue up to 10 crore may apply for exemption-u/s 56(2)(viib) 

The Ministry of Commerce and Industry, Department of Industrial Policy and Promotion has amended the Notification No. G.S.R. 501(E) dated May 23, 2017.

The Notification has made several changes, notable changes pertaining to tax are as under:

Certification for the purposes of section 80-IAC of the Act

A Startup being a private limited company or a limited liability partnership incorporated on or after 1st day of April 2016 but before 1st day of April 2021 may, for obtaining a certificate for the purposes of section 80-IAC of the Act, make an application in Form-1 along with documents specified therein to the Board which may, after calling for such documents or information and making such enquires, as it may deem fit, grant or reject the application by providing reasons.

Angel Tax provisions relaxed for startups-Approval for the purposes of clause (viib) of sub-section (2) of section 56 of the Act

Under the section 56(2)(viib), where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, then the aggregate consideration received for such shares as exceeds the fair market value of the shares is chargeable to income-tax under the head “Income from other sources”,

However, now it has been provided as under:

A Startup being a private limited company and in conformity with the definition as per definition stipulated at Para 1(a) shall be eligible to apply for approval for the purposes of clause (viib) of sub-section (2) of section 56 of the Act, if the following conditions are fulfilled: —

(i) the aggregate amount of paid up share capital and share premium of the startup after the proposed issue of shares does not exceed ten crore rupees,

(ii) the investor/ proposed investor, who proposed to subscribe to the issue of shares of the startup (hereinafter in this notification referred to as “investor”) has, —

(a) the average returned income of twenty five lakh rupees or more for the preceding three financial years; or

(b) the net worth of two crore rupees or more as on the last date of the preceding financial year, and

(iii) the startup has obtained a report from a merchant banker specifying the fair market value of shares in accordance with Rule 11UA of the Income-tax Rules, 1962.

(2) the application for approval under this para shall be made in Form-2 to the Board and shall be accompanied by the documents specified therein.

(3) The Board may, after calling for such documents or information and making such enquiries, as it may deem fit, —

(i) grant approval for the purposes of clause (viib) of sub-section (2) of section 56 of the Act, specifying the relevant details, including details of investor, amount of premium on which shares are to be issued, and the latest date by which the shares are to be issued; or

(ii) decline to grant the said approval after providing reasons.

It has also been provided that if any certificate or approval is found to have been obtained on the basis of false information, the Board may revoke such certificate or approval and in that event such certificate or approval shall be deemed never to have been issued or granted by the Board.

To implement the notification, the government has constituted an Inter-Ministerial Board that will have representation from the Reserve Bank of India, stock market regulator Sebi, Central Board of Direct Taxes, MCA  and the other relevant ministries.

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