Start-up founders write to PM seeking an end to angel tax

Intensifying their campaign against the ‘Angel Tax’ on start-ups, a group of entrepreneurs has written directly to Prime Minister Narendra Modi asking him to intervene and correct a “defective provision in law, which was brought in by the previous dispensation in 2013.”

The entrepreneurs have pointed out that start-ups need significant amount of capital early on and raising equity from angel investors, at a significant premium, was the only option for them.

In the last two years, they have said, many start-ups that raised angel funding in the assessment years 2015-16 and 2016-17 have received notices from the Income Tax department under Sec 56(2)(viib) of the I-T Act questioning the high share premium at which the shares have been allocation during the angel funding rounds.

Start-ups victimised

In many cases, they said, the assessing officers have disregarded the discounted cash flow method based valuation report and levied a tax (and penalty, which together can exceed 100 per cent of the fund raised) by recalculating the valuation via the book value method, disregarding the assessee’s choice of the valuation method. The book value method, the entrepreneurs said, was unsuitable for technology start-ups with asset-light businesses.

According to the letter, start-ups are in distress and many felt victimised due to the subjectivity, cost and arbitrariness involved in the implementation of this anti-evasionary measure that treated every assessee as guilty until proven innocent. While some start-ups have been forced to shut down, others have started moving to more friendly regimes like in Singapore, they said.

Acknowledging the Modi government’s thrust on promoting start-ups, because of which over 39,000 ventures had raised more than $38.5 billion in the last four years and created a value of $130 billion, the entrepreneurs said: “the StartUp India Movement is under serious threat; the situation is grave and it will slide further if immediate structural policy measures are not taken to halt this. Angel investors who support innovation by making risky investments are incentivised in many countries, but here in India they feel harassed.”

They said that if abolishing Angel Tax or Section 56(2)(viib) completely was not possible immediately, they suggested a modification in the law on a retrospective basis to safeguard genuine investments in start-ups. They wanted investments received by start-ups that had met or presently meet DIPP’s level 1 or basic recognition criteria and had raised capital from resident investors to be removed from the purview of the act.

“If the Angel Tax issue is not addressed immediately, then this will affect the number of start-ups in India in the next 3-4 years and derail the entire StartUp India movement,” they said.

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