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Budget 2019: Start ups won't face scrutiny for raising funds, says FM Sitharaman

Union Budget 2019: Finance Minister Nirmala Sitharaman has not only taken steps to resolve angel tax issues but has also announced proposals to relax conditions for the carry forward and set-off of losses for eligible startups

Budget 2019: Start ups won't face scrutiny for raising funds, says FM Sitharaman

Union BUdget 2019: Budget 2019 also proposes to relax the condition of minimum holding of 50 per cent of share capital or voting rights in a start-up to 25 per cent.

In its election manifesto, the BJP promised to establish around 50,000 new start-ups by 2024. Although Finance Minister Nirmala Sitharaman's Budget 2019 speech did not outline any roadmap to achieve this milestone, the startup ecosystem has plenty to look forward to courtesy tax sops and easing of regulatory norms.

"To resolve the so-called 'angel tax' issue, the start-ups and their investors who file requisite declarations and provide information in their returns will not be subjected to any kind of scrutiny in respect of valuations of share premiums," Sitharaman said in her speech. According to her, the issue of establishing the identity of the investor as well as the source of funds will be resolved by putting in place a mechanism of e-verification. "With this, funds raised by start-ups will not require any kind of scrutiny from the Income Tax Department," she added.

Furthermore, she promised that special administrative arrangements would be made by the Central Board of Direct Taxes (CBDT) for "pending assessments of start-ups and redressal of their grievances". Significantly, no inquiry or verification can be carried out by the assessing officer without the approval of the supervisory officer in such cases.

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FULL COVERAGE:  Union Budget 2019

"The devil of angel tax seems to be finally eliminated and several administrative measures announced should mitigate undue harassment of start-ups," said Suraj Malik, Partner - Transaction Tax, Tax & Regulatory Services, BDO India. This much-needed clarity on this contentious topic is expected to encourage new entrepreneurs and enable an atmosphere of increase in investments.

Another key proposal made by Sitharaman in her maiden Budget is that start-ups no longer have to justify fair market value of their shares issued to investors in Category II Alternative Investment Funds. In other words, the valuation of shares issued to these funds shall be beyond the scope of income tax scrutiny. At present, this benefit is applicable on Category-I AIF.

The Finance Minister further proposed to relax a couple of conditions for carry forward and set-off of losses. To begin with she proposed to enable start-ups to carry forward their losses so long as they meet either of the following two conditions - continuity of 51 per cent shareholding/voting power or continuity of 100 per cent of original shareholders. The provision allowing exemption of capital gains from the sale of residential property for investment in start-ups will be extended by two years. "Thus the benefit shall be available for sale of residential property on or before March 31, 2021," she added.

Budget 2019 also proposes to relax the condition of minimum holding of 50 per cent of share capital or voting rights in a start-up to 25 per cent. "The condition restricting transfer of new asset being computer or computer software is also proposed to be relaxed from the current 5 years to 3 years," Sitharaman added.

That's not all. The government wants to set up an exclusive television channel for startups that will serve as a platform for discussing issues affecting their growth, for funding and tax planning as well as match-making with venture capitalists. This channel will be designed and executed by the start-ups themselves.

"Start-ups can draw a lot of heart from this budget! One clearly vexed issue affecting most transactions was that of angel tax. That and other measures mentioned in the budget is bound to encourage more entrepreneurs to take the plunge," summed up Anant Ghuge, co-founder of Commwiser, a specialist firm focussing on professional services and the technology space.

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