Angel tax: Amid cheer for easier norms, an undertone of dissent

By: |
February 21, 2019 8:11 PM

The incremental relaxations in the controversial ‘anti-abuse’ provision in the Income Tax Act, 2012 aka angel tax don’t seem to have gone down too well with the entire startup and venture capital ecosystem.

tax alert, Taxpayers Beware, tax evasion, black money, income tax act, income tax penalty, prosecution, CBDT, income tax department, high value transactions73% of the startups that raised angel funding since their inception have been sent with one or more angel tax notices.

The incremental relaxations in the controversial ‘anti-abuse’ provision in the Income Tax Act, 2012 aka angel tax don’t seem to have gone down too well with the entire startup and venture capital ecosystem. While the majority have hailed the move and government’s intent in giving startups a nearly free hand to grow, an undertone of dissent still echoes the ecosystem.

No Way Out

The moot point among the stakeholders remain of startups that have already been slapped tax notices were excluded from the consideration.

More than 2,100 or 73% of the startups that raised angel funding since their inception (before or after 2011) have been sent with one or more angel tax notices from the income tax department, showed a survey by PE, VC body Indian Private Equity and Venture Capital Association (IVCA) and community social media platform LocalCircles earlier this month.

“The notification does not cover startups which are already caught up in assessment litigation. Thousands of start-ups are currently struggling with demand notices,” Alok Mittal, Co-founder, Indian Angel Network and CEO & Co-founder Indifi told Financial Express Online.

Piyush Jain that runs Mumbai-based crowdfunding platform ImpactGuru echoed that. “It is still unclear about what is going to happen to those startups who already are currently in active litigation under various sections and what is the implication of those rulings,” he said.

Key Alternatives

While extending the definition of startup from existing 7 years since its incorporation or registration date to 10 years has been welcoming but linking it to the turnover is questioned by startups. This means that if a startup’s turnover exceeds Rs 100 crore for any of the financial years since its incorporation/registration despite being less than a 10-year old entity, it would cease to be a startup.

“A realistic view of the market size is imperative for gauging startup’s potential and for the turnover assessment. While extending definition from 7 to 10 years may be beneficial for a section of the startups, those with a high growth curve, or ones addressing a larger market size, may not be able to leverage it favourably,” Medikabazaar (online medical supplies and equipment startup) CEO Vivek Tiwari said.

There are also voices that suggested bringing in profitability as a criterion for tax exemption instead of turnover or time since incorporation. Anand Kumar Bajaj, Founder and CEO at PayNearby (that allows neighbourhood retailers to use digital financial services through its app) for example suggested a 125% weighted tax exemption by the government to startups which are profitable with at least Rs 5 crore per annum.

“This will help startups to function with viability as a key driver. If the government can incentivize for viability, you will appreciate that investors or public funds can be optimally utilized beyond cash burn in cash backs,” said Bajaj.

Axe the Tax

Amid the latest changes to the guidelines, startups are still expecting to scrap of angel tax altogether even as last month multiple industry bodies including Nasscom, IVCA, TiE Global, and IAN had advocated for the same in a letter to the finance minister Arun Jaitley and commerce minister Suresh Prabhu.

“At the outset, the law taxing infusion into companies should be abolished,” said Harshal Kamdar, VC sector council member, IVCA, and partner, PwC.

“The taxes should have never been there in the first place. Entrepreneurs go through a tough process for raising capital and any taxes on that will kill the startup ecosystem,” said Srikanth Ganesan, Founder at Singapore and Chennai-based edtech startup LittleMore Innovations. The taxability of the source of the investor’s funds should be addressed by the investors and not by the startups, he added.

Nonetheless, scrapping angel tax has remained out of the question for the government. “(So) scrapping the ‘angel tax’ isn’t an option,” Financial Express reported earlier this month quoting sources.

Despite the existing concerns, there are startups like peer-to-peer lending platform RupeeCircle that are looking to leverage the new rules to raise capital from additional sources.

“After new rules, we are planning to raise approximately Rs 20 crores. With the exemption limit raised, we expect more corporate to be looking out for avenues of investment, which is a positive sign for the entire start-up ecosystem,” Abhishek Gandhi, Co-founder & CFO/CTO at RupeeCircle said.

The Mahindra Finance-backed RupeeCircle recently partnered with TATA AIG General Insurance Company to offer insurance cover against accidental death and permanent total disability.

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