India exempts small firms from angel tax to promote business

NEW DELHI (Reuters): India eased taxes for some new businesses yesterday, bowing to pressure to exempt them from an ‘angel tax’ on funds they have raised, in an attempt to boost investments and jobs.

Start-ups with an annual turnover of up to 1 billion INR ($ 14 million) will be exempt from paying after small business groups wrote to Prime Minister Narendra Modi last month saying thousands had received notices in the last few months to pay angel tax of about 30% plus a penalty on funds raised in the last seven years.

The Government has also raised the limit of investment to 250 million INR from 100 million INR on which tax exemptions would be available.

Modi, who is aiming for a second term in national elections due by May, faces criticism for not doing enough for businesses to create jobs.

Under new rules, ventures that have raised up to 250 million INR and registered with the Department for Promotion of Industry and Internal Trade will be completely exempt. And the investment limit for start-ups to get income tax exemption has been raised to one billion INR from 250 million INR, the Government said in a statement.

Commerce and Industry Minister Suresh Prabhu said a business would be considered as a start-up for a period of up to 10 years after incorporation and registration, raising the period from the previous seven years. Business leaders had complained after India’s income tax department issued notices to businesses who had received equity infusion in excess of “fair valuation”, asking them to pay angel tax on the “premium” paid by investors, treating it as income.

This had forced hundreds to shut down and or even flee India.

“Today’s announcement is a big relief for small companies,” said Local Circles Founder Sachin Taparia, a network of about 30,000 businesses.

He said new rules will address about 90% of their concerns, and promote investments by non-Indian residents and big companies in new ventures.

Companies will be barred from investing fund they have raised in residential buildings, shares and securities, jewellery or luxury cars, the Government said.

New companies are exempted from income tax for up to three years, Taparia said, adding the new rules could benefit about 16,000 registered companies employing nearly 300,000 employees.

Welcoming the Government move, Nakul Saxena of iSpirit, another group of new ventures, said it has eased up the process for start-ups to claim tax exemption and simultaneously expanded the scope of new ventures able to access tax exemptions.

“It now remains to be seen if these measures are implemented with the same spirit as they were formed,” said Saxena.