In a bid to generate funding in begin-united statesand provide certainty at the so-called ‘angel tax’, the Ministry of Commerce and Industry has issued any other notification easing the criteria to avail of the exemption under Section fifty six(2)(vii) of the Income Tax Act 1961.
Section fifty-six (2)(vii) taxes closely held organizations on the capital that they raise thru the problem of stocks in extra of the truthful price to resident investors. The erstwhile notification (issued by way of the ministry on eleven April 2018) required organizations, amongst different things, to reap a valuation document from a service provider banker specifying the truthful market price of issued stocks. As a result, the tax authorities had requested that sure begin-us justify how they came to the premiums cited in their valuation reports.
To solve this case, on 16 January 2019 the ministry issued a notification which eliminated the requirement to offer a valuation document. Now, simplest a justification of share costs is needed. In addition, the Central Board of Direct Taxes must now supply or decline tax exemption requests inside forty-five days of receipt of an application.
Despite the problem of this notification, uncertainty continued. As such, on 19 February 2019, the ministry issued a new notification, which supersedes both in advance notifications.
The latest notification reduces the trouble faced by using start-united states of America and similarly simplifies the standards for availing of the exemption underneath Section fifty-six (2)(vii).
New necessities
Entities will now be considered begin-u.S.For 10 years rather than seven, supplied that their turnover does no longer exceed Rs1 billion (instead of the antique requirement of Rs250 million) in any financial year.
Further, with the intention to grow the quantity of start-which can be eligible for the exemption, the threshold for the combined quantity of paid-up proportion capital and share charges following the issue of stocks has been accelerated from Rs100 million to Rs250 million. Moreover, even as computing the aggregate restrict of Rs250 million, price range from non-residents, challenge capital agencies and project capital budget will now not be taken into consideration. The erstwhile restriction of Rs100 million subsumed all investments. Now that funds from non-residents and project capital budget are excluded, resident buyers can now invest as much as Rs250 million.
Further, the new notification removes the requirement that investors be permitted (ie, they need to have a lower back earnings of at least Rs250,000 and have a net worth above Rs2 million), so one can in addition permit begin-u.S.A.To effortlessly get hold of finances from small man or woman investors.
The notification also excludes considerations obtained through indexed corporations (whose stocks are regularly traded) that have:
a net really worth above Rs1 billion in the closing day of the economic yr previous the 12 months wherein the shares are issued; or
a turnover above Rs2.5 billion within the financial 12 months preceding the 12 months in which the stocks are issued.
However, to avail of the exemption, investments can’t be made in any non-core commercial enterprise belongings, which includes land, buildings, shares, and securities. The investment might be confined for seven years from the quit of the monetary year in which the stocks are issued at a premium. While such restrictions may be visible as a circulate to channelize budget and decrease the time it takes to attain the spoil-even point, they will also abate the boom of begin-America seeking to establish subsidiaries.
Comment
This modern notification will offer start-America with a miles-needed reprieve in terms of the expanded threshold limits for paid-up share capital, letting them avail of Section 56(2)(vii) exemption more easily. However, this notification won’t treatment in advance troubles confronted by using begin-ups. A particular situation may additionally rise up wherein begin-united states may fall beneath 3 special notifications, depending on the applicable duration. Since begin-u.S.A.May raise budget in tranches, this can result in times in which extraordinary compliance duties are required for the identical buyers. In order to keep away from such a dichotomy, it’s far was hoping that the ministry will provide similar clarity with respect to the applicability of the notifications whilst addressing past problems.
