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New Delhi: The government on Tuesday said it would notify tax relief for startups struggling with the issue of taxation of share premiums received in excess of the fair market value.
The commerce and industry ministry said in a statement that a simpler way of granting tax exemption to startups under an anti-evasion provision dealing with the share premium will be issued on Tuesday. The Central Board of Direct Taxes (CBDT) will notify the changes separately.
The move seeks to redefine startups eligible for relief from what is known as the angel tax. According to the government decision, consideration for share sale, including premium up to ₹25 crore, will be exempted from the provisions of Section 56 (2) (viib) of the Income Tax Act that seeks to tax share premium in excess of fair market value.
Also, startups with sales up to ₹100 crore, up from the earlier ₹25 crore, will be considered eligible for the tax relief. According to the government decision, an entity will be considered as a startup for up to 10 years from the date of incorporation, up from the earlier seven years.
Such entities will not be questioned about the share premium that they receive if they are registered with the Department for Promotion of Industry and Internal Trade (DPIIT), the ministry statement said. However, the share premium received should not be invested in land or residential building other than those held as stock in trade or occupied, rented or used by the business. It should also not invest the premium in shares and securities, jewellery or in vehicles priced above ₹10 lakh other than those used by the entity in the ordinary course of business.
The government has also decided to exempt from angel tax the receipts of startups from share sales to listed companies with a net worth of ₹100 crore or sales of ₹250 crore. Premium received from non-residents and alternative investment funds, Category 1, registered with the Securities and Exchange Board of India will also be eligible for the exemption. To get the benefit, startups have to file a declaration with the DPIIT seeking relief, which it will share with the tax department, said the statement.
Taxation of share premium received in excess of fair value as income at 30% has been a big headache for new-age businesses that derive their valuation from their innovative business models, which is hard to explain in terms of the physical assets they hold.