New Delhi: In a major incentive, startups can now issue shares to investors at higher than fair value without worrying about tax consequences.
The Central Board of Direct Taxes (CBDT) has notified the much awaited tax exemption on investments above fair market rate for startups.
"The exemption provided to startups from the 'rigour' of section 56(2)(viib) of Income Tax Act has been long awaited," Amit Maheshwari, Partner Ashok Maheshwary and Associates LLP, said.
The effect of the CBDT's notification is that in case a startup gets investment from resident angel investors, family offices or funds which were not registered as venture capital funds, it will not be taxed even if the investment is made in excess to the fair value.
"It has been a long standing industry demand to abolish this Angel tax," Maheshwari said.
Under Indian tax law, if an Indian company receives share subscription amount from an Indian resident which exceeds the fair value of shares, then the excess amount is taxed as income of the Indian company, said Rajesh H Gandhi, Partner, Deloitte Haskins and Sells LLP.
"The notification now exempts startups from this rigorous provision. This is a welcome relaxation and would ensure that startups can issue shares to investors at higher than fair value without worrying about any tax consequences," Gandhi said.
A similar exemption already exists for Venture Capital Funds (VCFs).
Maheshwari said this Angel tax still poses threat to earlier investments which could be perceived as being overvalued in light of the declining valuations globally and in India.
Last week, the DIPP has launched a portal and mobile app through which startups can gather all latest updates on various notifications, circulars issued by various departments and different funding agencies.
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