Relief for startups as I-T dept goes soft on angel tax collection

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Investor community and startups have largely welcomed the government’s notification asking the Income Tax department not to use any coercive measures for the recovery of 'angel tax’ from startups, though they feel it’s only an interim measure.


The Revenue Department, in a notification, has asked the Income Tax (I-T) department to take “no coercive measures to recover the outstanding demand” in those cases where they had made additions to the income of companies falling under the definition of startups given by the Department of Industrial Policy and Promotion (DIPP).


The department has also asked for necessary steps to be taken for the “expeditious disposal of appeals” setting March 31, 2018, as a deadline. The move will bring relief to early-stage startups that have complained of being hounded by tax officials over disagreements of valuation due to which investments were being counted as an income.


“This notification is a positive move as it acknowledges that there is a problem in this field and therefore we feel it will be of great interest to watch how the cases are being disposed of. This will also lay down some guidelines of how these cases should be assessed,” says Bishakha Bhattacharya, Senior Director and Head of Public Policy at industry body Nasscom.


Several angel investment groups, HNIs and bodies such as Nasscom have asked for the removal of the angel tax or for the setting of a threshold value for angel investments in startups below which they should not be considered as income. The tax was introduced by the government in 2012 to deter money laundering in the name of startup investments.


An Economic Times article on Monday said that the DIPP is working on a notification that startups incorporated before 2016 that had got up to Rs 100 million in funding would not be liable to pay angel tax. No official notification has been received with this regard yet, but investors hope it will come soon.


“Certain things the government should not regulate. They should understand that if the startup ecosystem has to evolve, they require all kinds of funds - angel, venture capital and private equity. The problem is you find one wrong and regulate everything, you’re crippling innovation,” says V Balakrishnan, chairman of Exfinity Venture Partners who is also an angel investor.


Balakrishnan adds that if the DIPP does indeed notify that companies raising up to Rs 100 million are exempted from angel tax, it would be very good and bring much-needed clarity to the sector. Others have blamed the angel tax as being one of the leading reasons for a drop in angel investments in the country.


Sunil Goyal, Managing Director and Fund Manager at YourNest, an early stage venture capital fund, says that the IT department’s move will bring comfort to startups and allow them to get on with actually building their companies.


“All the investments that we have done in the past five to six years are going through this scrutiny and there’s no way the valuation can be justified. They tell these startups they will freeze their bank accounts and other things, but that is done away with for now,” Goyal adds.


He too supports the idea of a threshold to be set for investments in early-stage startups, below which they would not attract angel tax. Goyal says that the proposed Rs 100 million barriers would give angel investors more than enough room to invest in upcoming innovative companies and build India’s ecosystem further.

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