INSUBCONTINENT EXCLUSIVE:
Angel tax is applicable to angel investment in start-ups above their fair market valuationThe country's tax laws have some of biggest
names in its tech start-ups worried
Rajan Anandan of Google, along with ten other signatories including NASSCOM, Tie Global and Indian Angels Network, has written to government
about terror of angel tax.Angel tax is a provision in Section 56 (2)(vii b) of Income Tax Act, which taxes angel investment in start-ups
above their "fair market valuation", or when shares in a start-up are purchased at a premium or discount.In a letter to Finance Minister
Arun Jaitley, and Minister of Commerce and Industry Suresh Prabhu, start-up ecosystem says this is leading many start-up ideas to flee
country for a more investor-friendly regime, and also putting them behind fourth industrial revolution, which government itself, ostensibly,
wants India to spearhead.Even after multiple notices from Department of Industrial Policy and Promotion (DIPP) ordering "no coercive action"
against taxpayers who have received notices or orders on angel tax, letter states there are instances being reported even of bank accounts
of several start-up founders getting frozen."The provision to tax angel investment was introduced in Finance Act of 2012, a lot has changed
since then Compare harm it is causing vis-a-vis potential benefits
Investors are jittery, they are being driven out of markets, start-ups are finding that satisfying taxman on investments they've raised is
practically more difficult than raising funds itself," Ashish Agarwal, senior director-public policy at NASSCOM, told
TheIndianSubcontinent."The letters from CBDT (Central Board of Direct Taxation) to its field formations to go slow are not working
There is no outside solution than abolishing angel tax," he added."The tax department and government's Department of Industry and Policy
Promotion do not seem to be working in sync at all," agrees R Chandrashekhar, former president of NASSCOM and former secretary to Department
of Information Technology.When tax department's assessing officers simply feel they are doing their job and chasing revenue deadlines
before December 31 each year, because law asks them to, picture that emerges is that government's no-coercion notices only appear to be a
paintjob.Tax uncertainty around raising funds hasn't only forced companies attracting foreign investment, like Flipkart, Razorpay and
Practo, to shift headquarters out of country, it's hurting domestic start-up ecosystem most."We get mails on a daily basis from start-ups
that they've received a notice, we hear from investors that it is we who do due diligence of investee companies and we find when we invest,
This is a big dampener on entire ecosystem," Mr Agrawal said.An advisory firm to start-ups believes that start-ups continue to flee country
to set up shop in friendlier regimes like Delaware and Singapore because of fear of dealing with tax officers who do not fully understand
start-up ecosystem."The start-up policy which was brought in 2016, idea was to inspire entrepreneurs to start innovating
However results have not been up to mark and bureaucracy is playing a big role in it
With respect to angel tax, tax department's assessing officers are not able to differentiate between a shell company and genuine start-ups
The challenge is they are not in sync with how start-ups operate
The government should bring in more clarity in law so that discretionary power of a tax officer is reduced," Alok Patnia, managing partner
of Taxmantra Global, told TheIndianSubcontinent.A recent survey of over 15,000 start-ups conducted by LocalCircles, an online community of
start-ups, found that 38 per cent of start-ups received an income tax notice in 2018, 6 per cent received more than one notice, 24 per cent
start-ups or small and medium-sized enterprises (SMEs) want to wind up business in country in 2019, and 52 per cent of them see bureaucratic
inefficiencies as a major challenge to growth in 2019."One of key concerns that start-ups have, going into 2019, is corruption and
bureaucratic inefficiencies, where issues like angel tax become major pain points, even ahead of funding
Start-ups want that angel tax provision is removed altogether from law books for all DIPP-recognised start-ups, which are about
They are also willing to submit additional documentation to prove they are start-ups and not shell companies, but angel tax must go ahead of
2019 interim budget," said Sachin Taparia, founder, LocalCircles.The purpose of angel tax was ostensibly to weed out money launderers who
could use undisclosed income to invest in start-ups."There is no empirical evidence to show that there exists any systemic menace in this
If there is any investor who cannot explain source of investment, we suggest, by all means go after investor, but presuming every investor
paying premium or getting discount should not be deemed criminal and penalised," start-ups' letter to government appeals.The start-up
community now plans to make a case for striking down angel tax law before Prime Minister's Office ahead of Budget, citing a lack of
substantive progress from its to-and-fro with various government departments over past several months.
