Angel Tax: A third of start-ups got tax notices in 2018

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New Delhi | Published: January 17, 2019 5:55:30 AM

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.

angel tax, start upsThe Start-up India movement is under serious threat and will slide further if immediate structural policy measures are not taken to halt the tax notices, Nakul Saxena of iSPIRT wrote.

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.

This was highlighted by iSPIRT, a think-tank for the Indian software products industry, in a recent letter to Prime Minister Narendra Modi seeking his immediate intervention to halt these tax notices.

The Start-up India movement is under serious threat and will slide further if immediate structural policy measures are not taken to halt the tax notices, Nakul Saxena of iSPIRT wrote.

These notices, issued under Section 56 of the Income Tax Act, consider the value of angel funding received by start-ups, which is over and above the enterprise value, as ‘income from other sources’ and hence taxable at the marginal corporate tax rate of 30%. The start-ups on their part have argued that department’s methodology for calculating FMV by using the book value method was outdated, especially in the case of technology companies.

Meanwhile, the government is soon expected to do away with several procedural bottlenecks to make it easier for start-ups to avail of tax exemption at early stages. Sources said that the a start-up’s application for tax exemption, once received by department of industrial policy and promotion (DIPP), would be forwarded to Central Board of Direct Taxes (CBDT) which would take a decision on it within 45 days. Also, the requirement of applying to an inter-ministerial panel for the waiver would be done away with. The need to submit a report from merchant banker specifying the FMV of shares would also be removed.

Further, once the relevant notification is issued, to avail of the tax break, the angel investor would require to produce proof of returned income of Rs 50 lakh or more in the preceding year and net worth in excess of Rs 2 crore or the amount to be invested in the concerned firm, whichever is higher.

Currently, an angel investor is required to submit documents showing returned income of over Rs 25 lakh in the last three financial years while complying with the net worth criterion.

The government had earlier allowed start-ups to avail of themselves of full tax concession on investments up to Rs 10 crore from investors, including angel financiers. However, while its estimated that most start-ups receive funding of not more than Rs 4 crore in earlier stages, the rules haven’t provided any relief to most firms.

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In his letter to Modi, Saxena of iSPIRT also stated that start-ups require significant capital early on and raising equity funding via angel investors is the only option for them, which can only be raised at a premium for many reasons.

The start-ups in the country have raised over $38.5 billion in the last four years and have created a value of $130 billion along with huge employment opportunities, Saxena noted.

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