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The Indian Private Equity & Venture Capital Association (IVCA) has come up with a slew of suggestions to help resolve the thorny tax issues around certain ‘anti-abuse’ provisions in the income tax law — popularly referred as ‘Angel tax’ in industry and professional circles.
The main suggestion — which comes on the heels of a spate of tax notices sent to angel investors and start-ups — is to “automatically exempt” all registered start-ups up to ₹10 crore of total non-promoter capital raised. “We have made this suggestion as part of a slew of administrative options for the consideration of CBDT and DIPP to help resolve the difficult situation faced by many start-ups at the hands of Income Tax Department,” Gopal Srinivasan, former Chairman, IVCA, told BusinessLine .
In addition to the automatic exemption, any high networth individual (HNI) investments made along with an exempt investor such as SEBI-registered AIF I venture capital fund should be automatically exempted from demand notices. “This is also an administrative decision that could be taken,” Srinivasan said.
Alternative suggestion
If these suggestions does not find favour with the Central Board of Direct Taxes (CBDT), then alternatively all registered start-ups who file the proposed Angel investor declaration form (of DIPP), which has the PAN numbers of all shareholders, should be exempted from Section 56 (anti-abuse provision that brings to tax deemed income and not real incomes), according to Srinivasan.
The Department of Industrial Policy and Promotion (DIPP) is the key department in the Government that is focused on growth of start-up ecosystem in the country.
CBDT tracker
Srinivasan also said IVCA has proposed a tracker on the CBDT website if the Revenue Department feels that a specific-approval process is mandatory and only that is acceptable from the CBDT’s anti-abuse angle to create an (rules based) exemption.
The CBDT tracker on its Website should monitor the process progress, with an assured timeline for decisioning, the IVCA has suggested. Also, no third party experts should be given a fiduciary role for deciding who does and does not qualify. This should solely be only with government employees, according to IVCA.
Law changes
IVCA has now made a case for change in law to extend the current ‘angel tax’ (Section 56(2)(viib) exemption to all SEBI- registered AIF I and II funds. Currently, only Alternate Investment Funds (AIF) I venture capital funds (VCFs) are exempt from ‘angel tax’. It has now been pointed out to the CBDT and DIPP that Funds now use AIF II for VC investments quite commonly.
On other long-term solutions, the IVCA has suggested that a quick notice-resolution process be put in place and a waiver of the 20 per cent of the pre-appeal demand be given to start-ups.
Start-ups are capital starved and income tax law requires that 20 per cent of the tax demand amount be deposited with CBDT before an appeal on the same is admissible, IVCA has submitted.
PE/VC flows @ $33 b
Meanwhile, Rajat Tandon, President, IVCA, told BusinessLine that private equity and venture capital flows hit a record high in calendar year 2018 at about $33 billion, much higher than about $25 billion seen in the previous year. In 2016, PE/VC flows into India stood at about $16 billion, he said.
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