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Startups raise hell over angel tax

Angel tax has been a bone of contention for the Indian startup eco-system since 2016. Government imposed tax on the funding received by startups and unlisted companies from an external investor.

Mar 19, 2019 by The Passage Team
Startups raise hell over angel tax

A month has passed since the commerce minister assured entrepreneurs and angel investors that the process to seek exemptions from the so-called angel tax would be simplified. Yet, there is no on-ground relief and the startups are still complaining on the lack of action taken, Economic Times reported.

Angel tax has been a bone of contention for the Indian startup eco-system since 2016. Government imposed tax on the funding received by startups and unlisted companies from an external investor. A 30% tax is levied when startups receive angel funding at a valuation higher than its ‘fair market value’.

Minister Suresh Prabhu had informed via a series of tweets on February 19 that a gazette notification had been issued to simplify the process for startups to get exemptions on investments under section 56(2)(viib) of Income Tax Act, 1961.

According to an ET report around 127 companies had submitted the declaration form to seek exemption from angel tax on February 27 and were expecting a document that can be shown to the I-T department’s assessing officers. It also reported that 92 startups had received emails from the Central Board of Direct Taxation (CBDT) acknowledging that the self-declaration forms had been received.

Sreejith Moolayil, COO, True Elements, told Economic Times that the delayed acknowledgement is not enough to defend them during an appeal. “This doesn’t give us any proof to go defend ourselves in an appeal. It’s just an acknowledgement that they have received the documents we uploaded. We don’t know why it should take so much time, but it certainly isn’t the help we had asked for,” Moolayil said.

An anonymous source told the daily that it could take another month for an exemption certificate to be issued to startups. And it’s not clear if all startups that receive acknowledgements will get such a certificate.

Aprameya Radhakrishna, co-founder of TaxiForSure, who is also an angel investor told Rahul Gandhi, president of All India Congress Committee, “Some of my companies in which I have invested, have been getting notices asking them to pay tax on the amount that has been invested by us. This is with the assumption that we haven’t paid tax already. It feels like I am a criminal.”

Gandhi was talking to entrepreneurs and industry bodies in Bengaluru on Monday. “I think angel tax goes counter to the concept of startups. We are going to get rid of this tax when we come to power,” he replied.

Earlier, several industry bodies and entrepreneurs had suggested the government to create an automated system that automatically sieve out companies who have got exemption from the DPIIT and send tax notices to only those who have failed to get the exemption.

A survey by community social media platform Local Circles and the Indian Private Equity & Venture Capital Association (IVCA) had revealed that more than 2,000 startups that got funding from angel financiers, private equity and venture capital funds received angel tax notices.

“LocalCircles has met with CBDT and requested that something more than acknowledgement be furnished to startups so they can present the same to CIT appeals or assessing officers and seek relief”, said Sachin Taparia, chairman of LocalCircles. “We have also highlighted the critical need to identify these startups in the CBDT systems such that anytime they have a share premium event, a scrutiny assessment notice is not generated.”

According to a Tracxn report, since the enforcement of angel tax, the number of seed and angel investments in India has reduced by more than half — from 1030 in 2016 to 484 in 2018.

The Passage Team

The Passage is committed to creating in-depth content over technology industry across Asia with a focus on emerging startups in the technology, healthcare, education, food, tech, travel & mobility segments.

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