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05Jun

Angel Tax and its implication on startups in India

Background India ranks as the third largest global hub for startups. In 2014, the Government introduced the "Startup India" initiative with the aim of supporting and fostering startup growth, thereby boosting the Indian economy, promoting innovation, and creating employment opportunities. Startups differ from regular companies, partnerships, or limited liability partnership firms due to their unique characteristics. To qualify as a startup, an entity must meet the eligibility criteria outlined in the latest notification issued by the Department for Promotion of Industry and Internal Trade (DPIIT). However, despite the Government's efforts to create a conducive environment for startups, there are several persistent challenges that hinder their growth. One such challenge is the controversial "angel tax," which has become a cause of distress for startups and has a negative impact on the current startup ecosystem in India. The entrepreneurial community strongly opposes this tax and views it as a major obstacle. In an effort to provide relief measures and exemptions to encourage investment in startups, the government implemented the Startup India scheme. As part of this initiative, a notification was issued on April 11, 2018[1], outlining the procedure for granting exemption from section 56(2)(viib) of the Act to certain eligible startups. Subsequently, on January 16, 2019, the government issued another notification[2] to further ease some of the conditions for claiming this exemption. However, concerns regarding the applicability of this provision persisted among start-up businesses. These concerns included potential misuse of provisions by tax authorities during assessments on start-ups. As a result, several representations were made to the Government. In response, the Ministry of Commerce and Industry issued a new notification on 19th February 2019[3], replacing the previous notifications. This new notification expanded the definition of start-ups and further relaxed certain provisions for their benefit. The notification will apply to all start-ups, regardless of the dates on which shares are issued, from the date of their incorporation. However, shares issued prior to this notification date, and on which an addition under section 56(2)(viib) of the Act has been made, are exempted. The issue of angel tax gained significant attention within the Indian startup community when it was revealed that the Income Tax Department withdrew over Rs. 1 crore from the bank accounts of two startups, Travelkhana and Babygogo,[4] without prior notice. However, the recent notification issued by the DPIIT on 19th February 2019 has provided some relief to eligible startups by granting them tax exemption. CONCEPT OF ANGEL TAX Angel Tax, officially known as Section 56 (2) (vii b) of the Income Tax Act, imposes a tax on the funds raised by startups if the amount exceeds the fair market value of the company. It was introduced in 2012 by the UPA government with the aim of detecting money laundering practices and identifying fraudulent startups. To put it simply, Section 56(2)(viib) of the Act states that if a company, in which the general public is not significantly interested, issues shares at a premium, the amount by which the share issue price exceeds the fair market value of those shares, calculated according to the prescribed methodology, will be subject to income tax. In 2022, over 2,000 startups nationwide received notices to settle their angel tax liabilities, and some of them faced significant penalties for failing to promptly pay the tax. Moreover, the tax department has been demanding unnecessary documents, further complicating the situation for startups. Recently, the Indian government introduced new tax laws aimed at promoting the growth of startups in the country. These measures include an angel tax exemption, which has brought about a positive change in the regulatory environment. They provide relief and encouragement to both entrepreneurs and angel investors. This article examines...

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30May

The Builder-Buyer Battle for Real Estate: Deciphering Post Covid-19 Psychology

[Authors are advocates, Krishnamohan K Menon, Managing Partner in Mimansa Law Offices, Advocate on Record Supreme Court of India, Chaitanyashil Priyadarshi, Partner and Somya Jaitley, Associate] INTRODUCTION 1. Since the early 2000s, the Real Estate industry in India started seeing significant changes. Now with multiple players, mushrooming projects, billboards, and advertisements offering myriad schemes with near impossible return promises, real estate seemed to be the magical stairway to financial heaven. Some industrial players were seasoned while many were wide-eyed rookies with a taste only for short term profit. Thelatters’ funds were mostly cash routed and dubious and the fund application was even more so. While the offers were tempting to the buyer, the contents of the contract usually secured the builder and builder alone. The offers were grandiose, but promises were seldom kept and clearly siphoning was the norm. Consequently, the number of delayed & incomplete projects far outnumbered the timely delivered ones. 2. The good old saying goes- “if it seems to be too good to be true, it probably is”. That is exactly what happened to a majority of the investors who went ‘all in’ with their investments into such schemes; most came out with their fingers burnt. Some builders claimed that this collapse was triggered by the radical Governmental interference in the form of the Regulatory law RERA, tax revamp by way of GST and the so-called demon of Demonetization. Subtly though, some builders also accepted that this was the consequence of crony capitalism and the bubble burst was bound to happen one day or other. Whatever be the reason, the real estate economy went on a downward spiral and continues to do so. 3. The buyers now faced their biggest challenge- enforcement of their rights in the middle of a tailspin. The Consumer Forums, although liberal in terms of relief, could not offer any expeditious solutions. It is interesting to note that for a forum which is expected to dispose of cases within a year, the National Commission was granting adjournment dates in excess of twelve months. RERA grievance redressal mechanism, although seemingly promising, was not effectuated timely and was not functioning efficiently. Project restructuring seemed a farfetched dream with the banks rolling down the shutters. 4. The only glimmer of hope for the buyers seemed to be the Insolvency and Bankruptcy Code, 2016, which after protracted litigation and multiple amendments recognized the position of property buyers as ‘Financial Creditors’[1]. This conferred upon the buyers the power to trigger Insolvency proceedings under Section 7 of the Code against the Real Estate Company. For the first time, panic set in amongst the builders. Not only was this a summary and expeditious proceeding, an unsettled claim of debt would result in replacement of the management and investigation into the affairs of the Company. 5. The consequences were Bipolar - on the one hand there was expeditious settlement of claims (either by way of refund or delivery of alternate property) and on the other, many a Real Estate  Company shut shop and resigned to Insolvency. Although the revival of the Companies Post Insolvency was a rarity, the interference of the Hon’ble Supreme Court in a few cases saw a revival of some projects and restoration of some degree of sanity amidst the chaos. THE BATTLE 6. The builders, not used to this treatment, protested. What followed thereafter, was a contest worthy of a movie script: i. Round 1 to builders:The amendment to Section 7 of the IBC, which gave the buyers the Status of Financial Creditors, was challenged by a builder before the Hon’ble Supreme Court in Pioneer Urban’s case[2]. While issuing notice in the matter, the operation of...

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