The angel tax is typically an impost on the extra capital raised by an unlisted firm through the issue of shares over and above their fair market value.
In a move aimed at providing succour to start-ups, most of which have been slapped with tax notices, the government is considering raising the funding limit in a start-up that would be exempted from the so-called angel tax to Rs 25 crore from the current Rs 10 crore.
Sources told FE that the department for promotion of industry and internal trade (DPIIT) could also recognise companies that are in operation for up to 10 years as start-ups (instead of the current seven years), if they fulfil other criteria on innovation and turnover.
The angel tax is typically an impost on the extra capital raised by an unlisted firm through the issue of shares over and above their fair market value. According to Section 56 of the I-T Act, the excess capital so raised is treated as income and taxed accordingly. While the section is aimed at curbing money laundering, it has troubled start-ups and their investors.
Some experts, however, are sceptical about the benefits of enhancing the limit of funding to Rs 25 crore from Rs 10 crore, given the fact that 96% of start-ups that have received tax notices have raised below Rs 10 crore, according to a survey of 2,396 start-ups (that have been slapped with such notices) by LocalCircles and the Indian Venture Capital Association. At best, the move may benefit 20% of those that have received the notices and are capable of going through the rigours of filing relevant details that would satisfy the taxmen, said Sachin Taparia, founder and chairman of LocalCircles. Instead, a comprehensive mechanism must be created to exempt all start-ups from the angel tax if they submit critical details of their tax returns, monthly expenses and payroll records over the past two years, among others, said Taparia.
In April 2018, the government had said start-ups could apply to an eight-member inter-ministerial board for the tax relief if “the aggregate amount of paid-up share capital and share premium of the start-up after the proposed issue of shares does not exceed Rs 10 crore”. However, taxmen still continued to slap notices , stoking outcry and forcing the government to move swiftly to control the damage.
The latest proposals were discussed at a meeting on Monday between senior officials of the DPIIT, including its secretary Ramesh Abhishek, and those of the Central Board of Direct Taxes and representatives of various start-ups. In an interview on Saturday, revenue secretary Ajay Bhushan Pandey told FE that a special carve-out could be made for relief to start-ups under the relevant section of the I-T Act.
The government could also relax the criteria for investors to be eligible for exemption. The required net worth of such an investor could be brought down to Rs 1 crore from the current Rs 2 crore (as on the last date of the preceding financial year) or the average income should be more than Rs 25 lakh per annum for the preceding three financial years (from the current Rs 50 lakh).
“A final view on these issues will be taken by the panel soon and the guidelines will be issued after that,” said one of the sources. The tax notices consider the value of funding received by start-ups, which is over and above the enterprise value, as ‘income from other sources’ and hence taxable. However, while the tax man looks at traditional methods like discounted cash flows for estimating the value of a company, entrepreneurs say this method is redundant and outdated in new areas, especially start-ups operating in the technology space.
For its part, the government, while mindful of not hurting start-ups, was concerned about stopping shell companies using this route to funnel black money. “(So) scrapping the ‘angel tax’ isn’t an option,” said one of the sources.
Over 38% of the start-ups in the country — 39,000 at last count — have received one or more ‘angel tax’ notices in 2018, causing critical capital infusion in these firms at the seed stage to go down by 21% year-on-year, iSPIRT, a think-tank for the Indian software products industry, said in a recent letter to Prime Minister Narendra Modi seeking his immediate intervention to halt these tax notices