In last week, a controversy was again created when the Revenue Authorities
sent notices to start-ups for their income earned from ‘share premium’ or the
famous ‘angel tax’. However, the Government has assured that the start-ups will
not be taxed.
Nevertheless, the law for the startups is not only vague but also inconsistent.
In this article, I will discuss firstly, the law regarding the taxation of
Start-up companies, i.e. Section 80 IAC of the Income Tax Act and the DIPP’s
Notification released as on 11thApril, 2018,secondly, the discrepancy in
construing the law and the glaring contradictions between two laws.
The issue discussed in this article is with respect of levying tax from the
‘share premium’ of the start-up companies. This is dealt by Section 56 of the IT
Act, known as ‘Income from other sources’ or famously the ‘Angel Tax’.
A. Section 80 IAC of Income Tax Act, 1961:
Section 80 IAC of the Income Tax Act, 1961, in very simple terms, states that
“the eligible startup companies with eligible business, shall avail tax
exemption from all profits and gains, for three consecutive years…” The section
further lays down the eligibility criteria for ‘eligible startup’ and ‘eligible
business’, which is as under:
(a) eligible business means a business which involves innovation,
development, deployment or commercialisation of new products, processes or
services driven by technology or intellectual property;
(b) eligible start-up means a company or a limited liability partnership engaged
in eligible business which fulfils the following conditions, namely:
i. it is incorporated on or after the 1st day of April,
2016 but before the 1st day of April, 2019;
ii. the total turnover of its business does not exceed
twenty-five crore rupees in any of the previous years beginning on or after the
1st day of April, 2016 and ending on the 31st day of March, 2021; and
iii. it holds a certificate of eligible business from the
Inter-Ministerial Board of Certification as notified in the official Gazette by
the Central Government;
From the bare-reading of the Act, this provision seems complete and it does not
mention of following any other criteria’s other than already mentioned. However,
that is not quite the case. In April 2018, the DIPP released a notification
which prescribed for stricter regulations, withdrawing its earlier notification
B. Dipp’s Notification:
On 11thApril, 2018, the Department of Industrial Policy and Promotion released aNotificationwhich stated that for any start-up to avail tax exemption, it
must confirm to Section 80 IAC of the IT Act and obtain a Certificate from the IMB (Inter-Ministerial Board). The Notification also in detail, defines
‘start-up’ even though it has been previously defined by the Act.
However, the Notification lays down further conditions for the start-up to get
tax exemption, apart from what has been already laid down in the IT Act.
Start-ups which fulfil these conditions, will only be eligible for ‘exemption
from levy of income tax on share premium’. Following are those conditions:
a) It prescribes conditions for seeking approval for exemption from levy of
income tax on share premium received by eligible start-ups for both startup
companies and investors.
These conditions are as follows:
i. The aggregate amount of paid-up share capital and
share premium of the startup after the proposed issue of shares does not exceed
ten crore rupees and
ii. Requirement to furnish valuation report obtained from
Category I Merchant banker specifying Fair Market Value (FMV) of the shares in
accordance with Rule 11UA of the Rules.
iii. The conditions required to be fulfilled by the investor
·The average returned income of twenty-five lakh rupees or more for the
preceding three financial years; or
·The net worth of two crore rupees or more as on the last date of the
preceding financial year.
C. Inconsistency With Regard To ‘Angel Tax’:
The IT Act and the DIPP’s notification are both widely inconsistent when it
comes to exempting start-ups from income tax. The language of the IT Act is
simple and clear. If the the start-up company meets the eligibility requirement
given in the Act and falls within the definition of the ‘Start-up’, that
start-up should be exempted from ‘all profits and gains’, which will include the
share premium earned by the companies. Hence, no company would be subject to any
other stricter conditions than already laid down in the Act.
However, now coming to the DIPP’s notification released in 2018, there is huge
inconsistency with the Act. It lays down conditions specifically to avail tax
exemption for the so-called ‘angel tax’, which completely against the language
and intention of the IT Act.
So a situation might arise when the company is a ‘eligible start-up’ within the
meaning of IT Act and has also obtained Certificate from the Inter-Ministerial
Board, and hence, according to Section 80 IAC of the IT Act, can claim tax
exemption from the share premium. However, if it does not fulfil the criteria
laid down by the DIPP’s Notification, it cannot avail exemption from the
infamous ‘angel tax’.
The object of Section 80 IAC was to give hundred percent tax exemption to the
companies who qualify themselves as ‘start-up’. However, the ‘additional
criteria’ laid down by DIPP in its notification is wholly inconsistent with the
intentions of the Act and its language.
A notification cannot override the Act. However, in the present scenario, the
intention of legislature has been frustrated by the aforesaid notification.
Unfair Use of Delegated Legislation:
The notification is just a piece of delegated legislation and by way of such
subordinate legislation, entire new thing cannot be introduced, which was never
envisaged by the parent Act. Here, the criteria laid down by the DIPP’s
notification specifically in relation to ‘angel tax’ amends the intention of the
Parliament envisaged while making of S. 80 IAC, hence, to that extent, it is