Impact of angel tax on Indian startup ecosystem

The Department for Promotion of Industry and Internal Trade (DPIIT) on February 4, 2019 amended a notification issued in April 2018 for easing the norms for providing tax exemption to the startup firms. The Department of Industrial Policy and Promotion (DIPP), a trade facilitation platform of the Ministry of Commerce and Industry, was rebranded as DPIIT on February 1, 2019, as part of the Interim Budget for financial year 2019-20 in order to expand its scope. This comes as part of the Government’s continuous efforts to engage all stakeholders to address relevant issues related to the Indian startup ecosystem.

India is among the top five global destinations in terms of the number of startups it houses, and ranks third in the category of technology-focussed startups, as per the Associated Chambers of Commerce and Industry of India (ASSOCHAM). Hence, the sector has attracted strong foreign innovator interest. Funding from foreign private equity (PE) and venture capital (VC) firms into Indian startups nearly doubled year on year to reach US$16.7 billion in 2017, according to research firm Venture Intelligence. With state support, growing funding and innovation tie-ups, Indian startups are now entering a more mature phase.

As per the amended notification of the Department for Promotion of Industry and Internal Trade, an entity is considered as a Startup:

1. Upto a period of seven years from the date of incorporation/registration, if it is incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India. In the case of Startups in the biotechnology sector, the period shall be upto ten years from the date of its incorporation and registration.
2. Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded US$3.5 million.
3. Entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.

Provided that an entity has been formed by splitting up, or reconstruction of an existing business, its shall not be considered a ‘startup’. A Startup which is recognised by DPIIT is eligible to apply for approval for the shares already issued or proposed to be issued if the following conditions are fulfilled:

1. Aggregate amount of paid up share capital and share premium of the startup after the proposed issue of share, if any, does not exceed US$1.4 million.
2. The investor or proposed investor shall have —
   1. Returned income of US$70,000 or more for the financial year preceding the year of investment or proposed investment
   2. Net worth exceeding US$280,000, or the amount of investment made/proposed to be made in the startup, whichever is higher, as on the last date of the financial year preceding the year of investment or proposed investment.

Provided that in case the approval is requested for shares already issued by the Startup, no application shall be made if assessment order has been passed by assessing officer for the relevant financial year. The application, accompanied by the documents specified therein, shall be transmitted by DPIIT to CBDT with the necessary documents. CBDT within a period of 45 days from the date of receipt of application from DPIIT may grant approval to the Startup or decline to grant such approval. The Government has not conducted any survey to assess the adverse effects of angel tax on the Indian startup ecosystem.
As per the Ministry of Commerce and Industry, India’s startup ecosystem is expected to grow at a 10-12 per cent annual rate, with more than 1,000 new startups being born every year. Besides Startup India, the Government’s push for digitisation (Digital India), investment (Make in India), skill development (Skill India), e-governance, among other initiatives, has provided diverse opportunities for startups. India’s first ever states’ startup ranking has also been released to drive competition in innovation and in drawing foreign investors. Gujarat, Karnataka, Kerala, Odisha and Rajasthan have been best ranked in the regard.