Why Angel Tax Will Continue To Haunt Entrepreneurs?The stakeholders of the startup ecosystem in India desperately want the angel tax regime to be abolished

As soon as the year 2018 began, almost every union budget article in the Indian media discussing startups and venture capitalists had one common demand from the government - address the angel tax-related issue. This tax, which is listed under Section 56 (ii) of the Income Tax Act, attracts a tax rate of 30.9 per cent from private companies, including start-ups raising early stage investments domestically.

Commenting on the issue, in an interaction with Entrepreneur India,Dr. Srikanth Sundararajan, Partner, Ventureastsaid, "Taxing the entrepreneur viz. angel funding would imply less capital for growth, and an additional burden on top of service tax and income tax, the intent is to fund for growth, here it is treated as income, kind of contrary to 'startup India'."

Need to Clear the Air of Ambiguity

Even though the budget did not discuss a word about angel tax, the government indeed got into a damage control mode. Earlier this week, theDepartment of Industrial Policy and Promotionannounced that startups registered before 2016 and the ones which have raised up to INR 10 crore of funding don't have to bother about angel tax.

The industry cheered the move as media sources predicted that about 300 startups are expected to benefit from DIPP's initiative.

However, while sharing her views on the announcement,Apurva Damani, Director, Artha Venturesaid that the government should issue some more clarification on this new development.

"The question which they need to answer is whether the angel investment raised by a startup should be INR 10 crore cumulative or INR 10 crore each round to avail the relaxation," she asked.

Additionally, soon after the above announcement,Department of Revenuesent a notification to its income tax commissioners stating that no coercive measure to recover the outstanding demand (of angel tax) would be taken from companies that fall under the definition of DIPP.

For the record, according to the DIPP, a startup means any entity incorporated not prior to seven years, however for biotechnology, startups not prior to ten years, with annual turnover not exceeding INR 25 crore in any preceding financial year, and is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential for employment generation or wealth creation.

Even thoughShreyas Chandrahasan, Co-founder, Option3welcomed the move of theCentral Board of Direct Taxes(CBDT), he feels it still does not address the root cause of angel tax. "Real income can be taxed, but a variation between a funder's evaluation and the government's evaluation being considered taxable needs to be seriously revisited and addressed," he pointed out.

Calculated Move

The stakeholders of the startup ecosystem in India desperately want the angel tax regime to be abolished, however, the initiatives undertaken by the DIPP and CBDT only means angel tax is here to stay for the time being and the government will continue to protect some companies, if not all form the suffering.

Therefore, investors like Damani andAnil Joshi, Managing Partner, Unicorn India Venturesfeel startups should consider registering themselves with DIPP's Make in India mission to avoid future tax-related complications and benefit from initiatives like these.