Start-ups mull filing petition against Angel Tax

The Indian start-up ecosystem, led by former Infosys CFO and investor Mohandas Pai, is likely to seek Prime Minister Narendra Modi’s intervention against the Income Tax Department’s “arbitrary” way of questioning start-ups on issues relating to fund-raising.

Talking to BusinessLine , Pai said: “I am getting a lot of phone calls from various start-ups as well as investors, and we might file a formal petition. However, the appeal process in the country is broken and it takes over 15 years for a case to resolve. I think social media is the best way to reach out to the government, at present.”

On Wednesday, Pai had taken to micro-blogging site Twitter, tagging Finance Minister Arun Jaitley, Information Technology Minister Ravi Shankar Prasad, NITI Aayog CEO Amitabh Kant and Modi, to complain against the IT Department.

Pai tweeted: “Sir, Start Ups are getting harassed by IT for raising Capital, threatening to consider it as income! very bad scene and very many are angry and upset, may shift overseas. Appeal process broken, takes 15 years. Pl intervene.”

However, he declined to reveal whether he received any response from the government in this regard.

Calling the IT Department’s motive “vindictive”, Pai said the department cannot tax start-ups on the basis of the capital they raise, by calling it ‘income’.

“We are not questioning the right of any tax officer to question whether the money is legitimate, tax-paid money. But they are asking all the details — right from investor numbers, PAN numbers to balance sheet, etc. They have the PAN numbers and can pull out all the data. Why unnecessarily harass (start-ups) on the basis of fundings raised at a particular valuation?” he asked.

The IT department is also questioning angel investors, including Pai, who invest in their personal capacity, on investments they made in start-ups at a premium to the fair value ascertained by the Central Board of Direct Taxes (CBDT).

The amount raised in excess to the fair value is taxable at 30.9 per cent under the segment ‘Income from other sources’. It is also called Angel Tax and the government’s decision to levy this tax has led to a slowdown in the angel investments in the country, according to experts.

Sanjay Mehta, a Mumbai-based angel investor and a member of the Indian Angel Network, said: “Investors often value star-ups subjectively — a valuation that seem high to some might be fair to others. These are closed network deals. Hence, there are no empirical data available, unlike the listed entities, and in such a scenario, tax on investments in totally regressive.”

At a time when the government is promoting programmes such as Startup India and StandUp India to boost entrepreneurship in the country, such “draconian” tax laws can be a deterrent to the entire ecosystem, said another investor requesting anonymity.

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