Angel investor networks and startup industry bodies have come together to form a unified startup coalition, seeking the removal of the “angel tax” through recommendations to the Department of Industrial Policy and Promotion (DIPP).
There is a growing concern after the income tax department ordered about 100 startups to pay tax on their marked down valuations in recent funding rounds in November and December last year.
The startup coalition, which includes Nasscom, Indian Angel Network, Mumbai Angels, IVCA and TiE, has asked the DIPP to carve out angel investor groups while defining such networks and creating specific norms for such investments to exempt them from the angel tax including retrospective exemption. “For investors, taxing at fair value is collateral damage. We are the only country to tax angel investments,” said Saurabh Srivastava, Co-Founder of IAN.
The tax demands have been made for the assessment years 2013-14 and 2014-15. Experts believe that Section 56(2)(vii)(b) of the Income-Tax Act, 1961, under which these notices have been sent, was originally introduced to curb money laundering and is now being levied on startups.
“This (slapping of tax notices) is due to past actual cases where the tax department has deducted fraudulent transactions, but it is unfortunate that this rule has several unintended consequences on legitimate investments in the startup investing community,” said Gopal Srinivasan, Chairman of TVS Capital Fund.
Investors believe that there should be a level-playing field for both publicly listed as well as unlisted entities, in this case, startups — with a government body such as the DIPP recognising angel network groups in India, similar to VC funds registered with Sebi.
Apart from converting disallowed capital investment to income, experts feel that the tax levied further stresses the cashflow of the startup resulting in the company raising further rounds at an even lower valuation.
The Central Board of Direct Taxes (CBDT) had on June 14, last year, issued a clarification exempting government-registered startups from the tax. In several cases, however, the tax demand has been made in earlier years.
Industry trackers say that some of the startups may consider moving their base outside India if clarity is not provided. “Re-domiciling will only increase with this. I would recommend (that startups) leave India and re-domicile outside if they are further pained. We have worked to keep startups in India but moves like this make us helpless and frustrated,” tech investor TV Mohandas Pai told.
Source: Times of India
