India Provides Tax Relief for Start-ups

A new program announced by India’s Ministry of Commerce and Industry will provide a tax exemption for funds received from “angel” investors in new start-up businesses.  The new program had been expected for some time due to the impact of India’s tax law on investments in such businesses. 

Under section 56 of India’s tax law, any investments in companies are taxable to the extent that the amount paid for shares exceeds their current fair market value. 

Usually, angel investments precede any significant value in the shares, and thus result in a tax liability for the company.  India’s new exemption is designed to mitigate that problem.

Any start-up incorporated after April 1, 2016 but before April 1, 2021, will be eligible for the benefit on application.  It must be formed as a private limited company or a limited partnership.  The start-up must have received total investment of less than INR 2.5 million over its prior three years, and must get a report from a merchant banker verifying the fair market value of its shares.  Application is to an eight-member panel composed of representatives from the Reserve Bank of India, The Securities and Exchange Board of India, the Central Board of Direct Taxes, and additional agencies.  

There are also requirements for the angel investor.  The investor must have a minimum net worth of INR 20 million, or have an average income of more than INR 2.5 million over the prior three years. 

The new policy is intended to encourage the formation and growth of new businesses, particularly in the technology sector.

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