April 19, 2018
In a further move to encourage startups in the country, the Government has issued notification dated April 11, 2018 to grant certain tax incentives to startups as part of the Government’s ‘Startup India’ initiative.
Section 56(2)(viib) of the Income Tax Act (“the Act”) provides that, where a closely held company issues shares at a price more than the fair market value (“FMV”) of such shares, the amount received in excess of FMV will be deemed as ‘income from other sources’.
The ‘Startup’ community had expressed concern regarding applicability of the aforesaid provisions of section 56(2)(viib) of the Act, popularly known as ‘Angel Tax’.
Addressing the aforesaid concern, the Central Board of Direct Taxes (‘CBDT’) had earlier vide notification dated February 06, 2018 granted interim relief from such angel tax by directing the taxman to not undertake coercive steps in recovering pending taxes from startups under the provisions of section 56(2)(viib) of the Act. (Refer our TaxBuzz dated February 09, 2018).
The proviso to sub section (viib) of section 56 provides for exemption of the aforesaid provisions to certain notified class or classes of persons.
As a sequitur to the relief measures to startup, the Department of Industrial Policy and Promotion (“DIPP”) has issued Notification No 364(E) dated 11 April, 2018, thereby laying down the norms for notification of startups for the purposes of aforesaid proviso to section 56(2)(viib) of the Act.
The salient features of the aforesaid notification are as under:
An entity shall be considered as a startup:
The aforesaid notification has brought necessary respite from angel tax to startup companies seeking fresh investments from angel investors in its business. To that extent, it is a welcome move by the Government, however, looking at the size of businesses being commenced by various startup companies in this modern era of technology/ Digital Economy, the cap on the post issue of share capital of Rs. 10 crores is quite low and may not be applicable to many innovative startup companies. Accordingly, it is anticipated that the aforesaid cap may be revised to a more reasonable amount.
 The notification provides for procurement of a report from a merchant banker, in support of the valuation of shares so arrived, in accordance with the methods prescribed under Rule 11UA of the Rules, which amongst others, considers the discounted free cash flow (DCF) method to be an acceptable method of valuation.