The new notification for Angel Tax has come out and it has some interesting provisions that are explained below.
You have to be a startup: you can apply as a startup now. This is because this exemption is for startups. The definition of a startup, as recently changed, would mean any innovative entity that uses technology and is less than 10 years of age. This entity should not have clocked INR 100 crore in turnover for any year.
This means any entity incorporated after March 2009 will be considered until March 2019.
- If a startup has INR 25 crore each year, it would still be a startup.
- If a startup has INR 100 crore in even one year, it would not be considered a startup.
Whatever money you raise, will be exempt till total Share capital plus share premium touches INR 25 crore. This means that the total amount of capital issued should be below INR 25 crore.
This means an exempt startup will not have to pay any angel tax for up to INR 25 crore of capital raised. This can be in multiple tranches. A startup can raise INR 10 crore and then INR 5 crore and then INR 6 crore and all of it would be free from angel tax.
However, if a startup already has paid up share capital of INR 20 crore, even if a startup raises INR 8 crore, it shall not be eligible for the exemption.
In order to calculate the above mentioned INR 25 Crore, the amount of money received from the following will not be included
- Category 1 AIF: AIF stands for Alternative Investment Fund. Currently, only category one AIFs are exempt from this calculation. All funds that invest in startups are in category one.
- Venture Funds: All venture capital funds are exempt from this calculation.
- Non-Residents: Any money coming from outside India is exempt from this calculation. This includes Foreign Venture Funds, Non-Residents, and International bodies.
- Listed company: It has a net worth of INR 100 crore or turnover of INR 250 crore for the previous year. Also, the shares of this company should be frequently traded.
- A startup with 30 crore paid-up capital, where 10 crore is from a Category 1 AIF, would be eligible.
- A startup with 30 crore paid-up capital where 10 crore is from a Category 1 AIF and a Listed company, it would be eligible.
- A startup receiving any amount of funding from a foreign national would be exempt.
- A startup receiving money from an Indian venture fund would also be exempt.
In order to check that the company that has received investment is not a shell company, the startup cannot invest in any of the following assets
e. Vehicles or other modes of transport
h. Art (drawings, paintings, sculptures, etc)
i. Archaeological collections
Good: You are allowed to buy these things for a business. This means if you are in the business of supplying taxis, then you can buy vehicles. If you are in the business of online jewellery, then you can buy those. If you are a coworking space, you can buy a building. These purchases have to be for the purpose of business only.
Bad: You cannot buy these at all (for non-business purposes). You can make other money but still not buy any of these for seven years. You cannot buy these in the name of the company even to give to a company executive.
Also, you cannot create a subsidiary company as that would entail capital contribution or investment in shares of a company which is prohibited.
You need to sign a declaration form that says neither have you invested in those assets nor shall you do so and if you do then your exemption would stand cancelled and you will have to pay the amount. The notification mentions that this return should be signed:
- On the letterhead of the company
- It should be digitally signed
- The person signing it should be either the Managing Director or someone authorized by a power of attorney
Disclaimer: This does not constitute legal advice. Please refer to a professional for specifics of your case.