It is time for startup owners to rejoice! THE Government of India had launched the ‘Startup India’ initiative in January 2016 in order to build an ecosystem to nurture innovation and entrepreneurship. This move of the Government has helped create large scale job opportunities across the country and has also contributed to the economic growth of the country.
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As a relief to budding entrepreneurs, the Government announced that startups will avail tax concession if the total investment including funding from angel investors does not exceed INR 10 crore. According to the notification by the commerce and industry ministry, an angel investor who is picking up stakes in a startup should have a minimum net worth of INR 2 crore and an average returned income exceeding INR 25 lakh in the preceding financial years. With an introduction of this amendment, startups can enjoy easy access to funding which will ensure ease of starting a new business and promoting the startup ecosystem.
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Various startups have raised concerns to taxation of angel funds as per Section 56 of the Income Tax Act that provides for taxation of funds received by the entity. Almost 18 startups have received notices from tax authorities. The section provides that if a closely held company issues its shares at a price which is more than its market value, the amount received over and above the market value will be charged to tax as income from other sources. Startups also enjoy the benefit of income tax for three out of seven consecutive assessment years.
In order to avail the concession, startups will have to approach an eight member inter-ministerial board of certification. The board will consider applications of startups for claiming of the incentives. These amendments are introduced to address key demands of startups in terms of exemptions under the Income Tax Act. In the recent past, startups have flagged their grievances to the government regarding angel tax provision which they considered to be unfriendly to them. Normally about 300-400 startups get angel funding in a year. Government of India has extended tax benefits to only 88 startups out of 8,765 which have been recognized by DIPP since January 2016.