Indian startups can finally heave a sigh of relief. The government has relaxed a contentious tax rule and allowed startups set up after April 1, 2016 to qualify for tax exemptions if their total funding is less than Rs 10 crore and their revenue is less than Rs 25 crore. The decision addresses a key taxation concern of startups after the government imposed a so-called angel tax of 30% on their seed funding. Anger mounted after 18 startups received income tax notices a few months ago.

On the other hand, the notification fails to acknowledge what happens to the startups launched before 2016 for a part of the funding they had raised was taxed under the earlier rule. Industry voices call for clarity on that. For the newer startups, this serves as good news but for those who have already received income tax notices, their concerns remain to be addressed.

“With the introduction of amendments through this notification, startups are likely to have an easy access to funding which in turn will ensure ease in starting of new businesses, promoting startup ecosystem, encouraging entrepreneurship, leading to more job creation,” the Ministry for Commerce and Industry said in a statement.

Startups have been complaining about the government's so-called angel tax or a 30% income tax these companies raised in seed funding. In February, the IAN, along with other industry consulting firms like NASSCOM and TiE (The IndUS Entrepreneurs) Mumbai, issued a joint statement demanding the angel tax be scrapped. Angel investors hope the amendment will have a positive impact. “The positive is that the government is working to help address the ‘angel tax’ issue but the need of the hour is to make it less, not more, onerous and bureaucratic. Else we could stifle a growing startup ecosystem,” said Padmaja Ruparel, co-founder, Indian Angel Network (IAN).

Tax experts say the notification increases the compliance burden on startups as funding from a new investor would require fresh approvals from the inter-ministerial board specifying details of proposed investors. Now it’s also compulsory for startups to register with the Department of Industrial Policy and Promotion (DIPP). As per Pranay Bhatia, Partner, BDO India, a tax advisory and Regulatory services firm, the notification seems reasonable which considers the limitation on the turnover of INR 25 crore to be eligible as a start-up. “Having said so, it increases the compliance burden on the start-ups as such they will have to file forms for claiming profit linked tax benefits and angel exemption,” he said.

According to a PTI report, the government has extended tax benefits to just 88 startups out of 8,765 that have been recognised by the DIPP since January 2016. Some 300 to 400 startups receive angel funding in one year.  With so many startups and investors in the market currently, this seems like another big hindrance in the process.

All startups seeking exemptions will have to go through an eight-member panel for the application to be reviewed. Exemptions will only be granted on a case to case basis. Industry experts see it as a partial relief only and fear that this might just slow down the entire process altogether. “This is definitely a good move by the government, which comes with a mechanism to help genuine startups. There is a procedural layer that has been introduced and we hope it works. The only caveat is that approvals should not too long and should not be cumbersome," says Anil Joshi, managing partner at Unicorn India Ventures, a venture fund.

(Additional reporting by Debojyoti Ghosh and Deepti Chaudhary)

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