The Finance Minister Nirmala Sitharaman presented the first budget for the second term of the Modi-led government on 05 July, 2019. The Budget 2019 outlines the government’s vision of a “$3 trillion economy in the current year”.The budget proposed a number of changes in the current scheme of affairs directed at growth and development of the “entrepreneurial spirit” of the country. There are a number of specific benefits for start-ups in the budget, including easing of the process for getting angel tax exemption.

Ease in Angel Tax norms

With “emphasis on start-ups” being a part of the “10-point vision for the decade” in the Finance Minister’s budget speech, a major relief to the start-ups was announced on the issue of angel tax. In 2012, there was an amendment introduced in the Income Tax Act, which required companies to pay tax on the consideration received against shares issued at a premium, if the consideration received exceeded the fair market value. This amendment was particularly problematic for start-ups, since their valuations were higher than the fair market valuation arrived at by the tax officials.

On February 19, 2019, the government issued a notification that provided certain additional clarification on the issue of angel tax. This notification benefitted start-ups as it eliminated the process of seeking approval for exemption from the Inter-Ministerial Board of Certification that existed earlier. Additionally, on March 5, 2019, the Central Board of Direct Taxes vide their notification has notified that provisions of Section 56 (2) vii(b) of Act shall not apply to consideration received by a company for issue of shares that exceeds the face value of such shares, if the said consideration has been received from a person, being a resident, by a company which fulfils the conditions specified in notification dated 19th February, 2019.

In her budget speech, the Finance Minister announced that to resolve the so-called angel tax issue, start-ups will no longer be subject to any kind of scrutiny by the income tax department in respect of the valuation of the shares, provided the identity of the investor and the source of his funds are duly verified. Additionally, it has been proposed that e-verification mechanisms will be put in place for this purpose. These amendments will further simplify the process and allow start-ups to focus on business.

Another significant announcement that has been made is that the angel tax exemption has also been extended to category – II Alternate Investment Fund (AIF). Earlier, only category – I AIF were exempted under this provision. The minister also announced that income tax assessing officers will be required to take prior approval from their supervisors for the inquiry or verification of the income tax return filed by start-ups.

Capital Gains for Purchasing Start-up’s Shares

Any individual earning capital gains from sale of residential property is exempted from taxation on the capital gain if the consideration from the sale is used to subscribe to equity shares of a start-up before the date of furnishing returns, and the company utilizes this amount to purchase a new asset within one year of subscription of the shares. The exemption is conditioned upon the individual resultantly acquiring more than 50% share capital or voting rights in the start-up after having made the subscription.

The budget announcements extended the application of this exemption on the sale of residential property till the end of next financial year. This was followed by relaxation under the provision by reducing the minimum share subscription requirement for the assessee from 50% to 25%.

Carry forward and set off norms relaxed

The norms for carry forward and set off of losses by start-ups during any year before the previous year have been proposed to be relaxed such that a change in shareholders from the last day of the year of loss to the last day of the year of set off, is allowed if 51% of the voting power is beneficially held by the same persons. As of now, the law requires all shareholders to continue holding the shares of the company in the said period in order to allow setting off.

Start-ups Making EVs

Start-ups planning to engage or already engaged in making electric vehicles (EVs) received a major push from the budget announcement that goods and sales tax on EVs will be reduced from 12% to 5%. The sale of EVs has also been incentivized by proposing an income tax rebate of 1.5 lakh rupees to customers on interest paid on loans to buy electric vehicles. The incentives include custom duty exemption on lithium- ion cells, and income tax benefits for makers of solar electric charging infrastructure and lithium storage batteries.

Incentives to FinTech Start-ups

The budget also seeks to encourage digital payments by levying TDS of 2% on cash withdrawals exceeding 1 crore rupees in a year from a bank account and abolishing charges/Merchant Discount Rate (MDR) for digital payment at businesses with an annual turnover of more than 50 crore rupees. This creates an opportunity for start-ups offering financial technology services.

Proposals for Encouraging Entrepreneurial Initiatives           

One of the highlights of the budget was the announcement to launch a TV channel solely dedicated to start-ups in India under the Doordarshan umbrella. The channel would be run by start-ups and provide a platform for discussions related to funding, tax- planning and the challenges faced by entrepreneurs. Further, the minister announced setting up of 80 Livelihood Business incubators and 20 Technology Business incubators this year that would engage in skill development and subject specific training of candidates by faculties of different schools with the object of entrepreneurial development in the country. Lastly, the budget proposed setting up of a social stock exchange to allow listing of social enterprises and voluntary organizations which will be regulated by SEBI.

In this budget, the government having announced significant changes to the existing legal norms, which will undoubtedly boost the start-up ecosystem even further.

This post has been contributed by Ms. Vaneesa Agrawal and Ms. Sanyukta Srivastav.

[DISCLAIMER:  This article is for academic purpose and is solely to provide readers with general information. The information contained herein does not constitute legal or a professional advice.]