Tax law eased for Indian start-up investments

The exemption, announced via the government's Startup India entrepreneurship initiative, will effectively eliminate the so-called "angel tax" under which start-ups were required to pay income tax on investments from unregistered venture capital funds or high net worth individuals that exceed the company's fair market value.

Only future investments will qualify for the exemption; investments made prior to the announcement will still be treated under the old rules.

Companies that wish to take advantage of the new regulation must receive a certificate stating they meet the Department of Industrial Policy and Promotion's definition of a start-up: incorporation within the last five years; annual turnover of no more than INR250 million ($3.7 million) in any preceding financial year; and a business model driven by technology innovation or intellectual property. 

The angel tax was introduced in India's 2012 Finance Act, which defined capital raised through issuance of shares in an unlisted company above market value as "income from other sources." Depending on the size of an investment, a start-up could be liable to pay up to 33% tax on these investments. Industry players have warned in the past that the policy was regressive and would discourage start-ups in India.

The government and regulators have taken steps in recent months to clarify and simplify the country's tax policies, with some fallout for private equity and venture capital.

In May the government announced the amendment of the double taxation agreement with Mauritius to require investors based there to pay the same capital gains tax rate as domestic investors. This followed a number of recommendations Securities and Exchange Board of India (SEBI) intended to improve the environment for start-ups in India, in part by making it easier for VC and PE funds to do business in the country.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• South Asia
• Venture
• Early-stage
• Regulation
• Technology
• India
• tax