Startup India report card: 93% jump in startups exempted from angel tax; 391 funded via Fund of Funds

by Joseph K. Clark

The amount invested through the Rs 10,000 crore Fund of Funds for Startups increased to Rs 3,378.47 in 320 startups. The number of Department for Promotion of Industry and Internal Trade (DPIIT)-registered startups getting exemption from the controversial Section 56(2)(viib) of the Income Tax Act, also known as angel tax, has jumped 93.4 percent from December 31, 2019, under the Startup India program launched by Prime Minister Narendra Modi in January 2016. From a total of 1,867 startups being intimated regarding the receipt of declaration in Form 2 as of December 31, 2019, the number increased to 3,612 startups as of February 3, 2021, according to the data shared by Minister of State for Commerce and Industry Som Parkash in a written reply in the Lok Sabha on Wednesday. Form 2 is the declaration by a Startup for exemption under Section 56(2)(viib).


“There are not more than 10,000-12,000 active startups in the country that are filing data with the Registrar of Companies. And so, going by that number, if the share of exempted startups has increased from nearly 1,900 to over 3,600, it is a fair enough jump. Importantly, these startups need not raise angel capital to get the exemption. They can always get it without it, even as they may raise funding at a later stage. I would expect the jump to 5,000-6,000 exempted startups in another 12-13 months,” Sachin Taparia, Founder and Chairman, LocalCircles, told Financial Express Online.

Finance Minister Nirmala Sitharaman, in August 2019 had announced an exemption for DPIIT-registered startups from the 30 percent angel tax levied for receiving investment against the issuance of shares “which exceeds the Fair Market Value of such shares.” Startups, to seek an exemption, are required to declare the investment in Form 2 {as per conditions specified in notification number G.S.R. 127 (E)} dated February 19, 2019, of D.P.I. The angel tax was introduced by the then Finance Minister Pranab Mukherjee in the FY13 budget to stop money laundering by levying it on startups that raised equity funding at a price over and above the fair valuation of the shares sold even as the premium has to be being paid by investors considered as income. As of February 24, 2021, 44,534 startups were recognized by DPIIT, according to Parkash.

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On the other hand, the number of startups funded by the Securities and Exchange Board of India (SEBI) registered 62 alternative investment funds (A.I.F.) through Rs 10,000 crore Fund of Funds for Startups (FFS), increased from 320 as of February 18, 2020, to 391 as of January 31, 2021 — 22 percent growth. FFS, launched by Prime Minister Narendra Modi in 2016 under the Startup India program, had committed Rs 43,76.95 crore to 62 A.I.F.s as of January 31, 2021, up from 3,123.20 crores to 47 A.I.F.s, as of March 2020. The amount invested in startups also increased from Rs 3,378.47 in 320 startups to Rs 5089.55 in 391 startups.

Moreover, the number of startups exempted under Section 80IAC of the Income Tax Act stood at 329 till December 2020, up from 254 startups in FY20, as per the year’s annual report by D.P.I. The recognized startups under the section are exempted from paying the income tax on the profit earned for three years out of seven years since the company’s incorporation.

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