Union Minister of Commerce & Industry and Civil Aviation, Mr. Suresh Prabhu has cleared a proposal aimed at simplifying the process of exemptions for Start-ups under Section 56 (2) (viib) of the Income Tax Act (‘Act’). The Department for Promotion of Industry and Internal Trade (DPIIT) has issued attached gazette notification dated 19.02.2019 to this effect.

As you may be aware, deemed income provisions of Section 56(2)(viib) of the Act primarily deals with taxability on issue of shares by a closely held company where the amount of aggregate consideration received from a resident person exceeds the fair market value of the shares issued. Please note that startups satisfying eligibility criteria have been exempt from the provisions of Section 56(2)(viib) of the Act.

Following changes have been introduced vide attached notification:

(A)Definition – Vide attached notification, the definition of start-up has been amended whereby:

1. An entity will be considered as a start-up up to a period of 10 years from the date of incorporation and registration (in place of the earlier duration of 7 years); and
2. An entity will continue to be recognised as a start-up, if its turnover for any of the financial years since incorporation and registration has not exceeded Rs. 100 crore (in place of Rs. 25 crore earlier).

(B)Exemption Eligibility – Following additional criteria with respect to exemption eligibility has also been introduced vide attached notification:

1. Aggregate amount of paid up share capital and share premium of the start-up after issue or proposed issue of share should not exceed Rs 25 crores.
2. Consideration received by start-up for shares issued or proposed to be issued to a listed company having a net worth of Rs.100 crore or turnover of at least Rs. 250 crore will also be exempted.
3. Aggregate limit of Rs. 25 crore mentioned above will exclude consideration received by start-up from the following classes of persons:
   a) Non-Residents;
   b) Alternative Investment Funds- Category-I registered with SEBI; and
   c) Listed company having a net worth of Rs.100 Crores or turnover of at least Rs. 250 crore provided that its shares are frequently traded as per SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

(C) Non permissible investments – In order to claim exemption, the Start-up shall not invest in certain specified assets (i.e. residential/commercial house, loans and advances, capital contribution, shares and securities, mode of transport actual cost of which exceeds Rs 10 lakhs, jewellery, other assets like archaeological collections, drawings, paintings, sculptures, any work of art or bullion). However, wherever required, exemption has been given to a start-up required to invest in certain specified assets in ordinary course of their business.

Please note that the start-up shall not invest in any of the assets specified above for a period of 7 years from the end of the latest financial year in which shares are issued at a premium.

For obtaining an aforesaid exemption, the start-up will be required to file a duly signed declaration along with requisite documents with DPIIT. The declaration along with requisite documents shall then be transmitted by DPIIT to Central Board of Direct Taxes.

To know more about DIPP notification dated 19 Feb 2019 –  click here

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