In a major incentive, startups can now issue shares to investors at a higher than fair value without worrying about tax consequences.
In a major incentive, startups can now issue shares to investors at a higher than fair value without worrying about tax consequences.
The Central Board of Direct Taxes (CBDT) has notified the much awaited tax exemption on investments above fair market rate for startups. “The exemption provided to startups from the ‘rigour’ of section 56(2) (viib) of the Income-Tax Act has been long awaited,” Amit Maheshwari, partner, Ashok Maheshwary and Associates LLP, said.
The effect of the CBDT’s notification is that in case a startup gets investment from resident angel investors, family offices or funds which were not registered as venture capital funds, it will not be taxed even if the investment is made in excess to the fair value. “It has been a long standing industry demand to abolish this Angel tax,” Mr Maheshwari said.
Under Indian tax law, if an Indian firm receives share subscription amo-unt from an Indian resident which exceeds the fair value of shares, then the excess amount is ta-xed as income of the Indi-an company, said Rajesh H. Gandhi, Partner, Deloi-tte Haskins and Sells.
“The notification now exempts startups from this rigorous provision. This is a welcome relaxation and would ensure startups can issue shares to investors at higher than fair value without worrying about any tax impact,” he said.
