Not entirely satisfied with the Centre’s recent procedural changes for availing Angel Tax exemption, the private equity and venture capital industry has mounted another effort to persuade the government to completely release start-ups from the stranglehold of the taxman.

Ahead of the upcoming Budget, the Indian Private Equity and Venture Capital Association (IVCA) has requested the government to amend the income tax law so as to “automatically” exempt all start-ups — which make the cut under the latest DIPP guidelines — from the Angel Tax provision.

A case has also been made to exempt all SEBI-registered Category-I and Category-II Alternative Investment Funds (AIFs) from Angel Tax provisions — Section 56 (2) (viib). “The Angel Tax exemption should not be restricted to only AIF-I venture capital funds and venture capital undertakings, as many other types of funds (social impact, private equity) are now significant investors in start-ups,” Padmanabh Sinha, Chairman, IVCA and Managing Partner, Tata Opportunities Fund, told BusinessLine .

Leveraging new-age tools

Sinha said that the IVCA has also suggested to the Department of Industrial Policy and Promotion (DIPP) that start-ups fulfilling the criteria specified in the January 16 guidelines should “automatically” be eligible for Angel Tax exemption.

“No approval should be required and the process for seeking it by way of an application should be done away with, ” Sinha said. Sinha added that the income-tax personnel may not have the capabilities to assess the fair value of thousands of start-ups and should use data analytics, artificial intelligence and other tools at their disposal to target a very narrow base of start-ups.

This will boost the ease of doing business and help unearth actual misuse against the current “spray and pray approach”.

The DIPP has convened a meeting on February 4 to discuss the issues, which are largely seen as an unintended effect of Section 56(2)(viib).

In its latest submission to the DIPP, the IVCA has called for tweaking the threshold of ₹10 crore for the aggregate amount of paid-up share capital and share premium of the start-up after the proposed issue of shares, if any, so as to exclude (i) capital issued at par, and (ii) the capital contributed by exempt investors (AIF I, foreign investment under any of the alternative routes viz FDI, FVCI) and promoters’ own money.

Also, if a capital raise happens along with an exempt investor — at the same pricing and at the same time — the Angel Tax provision should not apply to the capital contributed by non-exempt investors (Angels) who participate in that round, said the IVCA.

Changes with retro effect

IVCA also wants the changes, if any, made to the income tax law to provide automatic exemption to start-ups to be applied retroactively to all the DIPP-registered start-ups that have received taxman’s notices as well. Many private equity industry players have said that although the DIPP had come with a new procedure for availing Angel Tax exemption, the pain point of those who had already been served notices was yet to be addressed.

Harshal Kamdar, Partner, PwC and VC Sector Council Member, IVCA, said that the government’s recent efforts, although encouraging, have not met with the expectations of the start-up ecosystem.

“The government should instead completely abolish Angel Tax from the statute book,” he said.

Vikram Gupta, Partner, Ivy Capital, said that some of Ivy Capital’s investee companies (start-ups) are facing the brunt of Angel Tax notices of the taxman.

He noted that such notices were not only on ‘valuation’ issues, but also issued for reasons around ‘sources of funds’.

comment COMMENT NOW