Suresh Prabhu
Commerce Minister Suresh PrabhuTwitter/TERI

In a major policy tweak, the central government has changed the definition of startups which is going to boost the entire ecosystem. The Ministry of Commerce and Industry has said that an entity will now be considered as a startup till a period of 10 years from the date of incorporation/ registration as against the current period of 7 years. Further giving relief to the startups, the government has raised the limit of funding that would be exempt from Rs 10 crore to Rs 25 crore.

The Commerce Minister, Suresh Prabhu said that a round table was organized on February 4 which was attended by a number of startups, angel investors and other stakeholders. Major issues pertaining to angel tax were discussed in the meeting. The proposals made by the commerce ministry aims at simplifying the process of exemptions for startups under section 56 (2) (viib) of the Income Tax Act which is commonly referred to as angel tax.

Suresh Prabhu further added, "An entity shall be considered a startup if its turnover for any of the financial years since its incorporation/registration hasn't exceeded Rs 100 crore instead of the existing Rs 25 crore." For a long time, the startups were raising their concern on taxation of angel investments and other issues which needed immediate intervention from the government.

Furthermore, all investments into eligible startups by Non-Residents, Alternate Investment Funds- Category I which registered with SEBI will also be exempt under Section 56 (2) (viib) of Income Tax Act till the limit of Rs 25 crores. As per Section 56 of the I-T Act in Budget 2012, funding through angels are subjected to over 30% tax if it is more than the fair market value (FMV). It is clearly mentioned that companies including mature private enterprises to small startups are liable to pay taxes on money invested at the capital.

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In this photo taken on January 10, 2017, start-up companies work out of Nasscom's Startup Warehouse facility, which incubates start-up tech companies, in Bangalore.MANJUNATH KIRAN/AFP/Getty Images

The startups and the angel investors have hailed the policy change introduced by the government. Speaking to financial daily, the Economic times, Saurabh Srivastava, the Chairman of Indian Angel Network said, "I am delighted that the government has, in effect, abolished angel tax for startups. Kudos to DIPP for their leadership and to MOF/CBDT for collaborating to make this happen. Angel tax had begun to dampen the enthusiasm of angel investors and startups, who had begun migrating abroad. Today's announcement will move India from third place to the number one startup nation in the world. This will transform India's economy."