ThinkStock PhotosThe IVCA survey showed that 73% of the 2,883 respondents received the angel tax notices. The startups said that they have received the notice for raising capital over the “fair market value” or for raising capital from unknown sources.
ET had on January 30 reported that IVCA had launched the survey to find out details of startups that are affected by angel tax after the government sought data to resolve what is blamed as an issue that could play spoilsport for India’s startup industry.
Angel tax deals with premiums paid by investors while they invest in startups. Tax officials have questioned increasing valuations of startups even when revenue is falling or remaining stagnant. The revenue department deems the capital in excess of a fair market value as ‘other income’ that is taxable.
Also, in cases where the investor is not Indian, the tax department has in the past issued notices branding such investments as “unexplained cash credits”, charging a 30% tax on those. It had sent notices to many startups, asking them to pay the tax.
THE ECONOMIC TIMESThe IVCA survey asked, among other things, whether the startups had received notices under the two income tax sections — 56(2)(viib) and Section 68. While 56(2)(viib) deals with valuations (classification of a funding as income or investment), Section 68 deals with unexplained credit. About one fourth of the startups that received notices said that they have received notices under both the income tax sections.
“Like we said, let data do the talking; this brings more clarity to the issue of angel taxation. We have seen active participation from angel networks, VCs that had reached out to all of their portfolio startups and thus seemingly this survey gives more credible data,” said Rajat Tandon, president, IVCA.
Industry estimates showed that there are around 7,000 startups in India. The IVCA had managed to get responses from more than 2,500 startups.
As per the survey in 95% of the cases, the tax notices were issued wherein less than ₹10 crore was invested. Meanwhile, the government last week came out with one more notification on the issue. Tax experts said the latest notification would have absolutely no impact on the ongoing controversy.
“This is just a procedural notification, which CBDT was required to issue to put in place the mechanics to make effective the changes made by Department of Industrial Policy and Promotion …Earlier, the inter-ministerial board set up by the DIPP was authorised to grant approval. This notification doesn’t make any new changes to address the woes of the startups,” said Rakesh Nangia, managing partner, Nangia Advisors.
“The angel tax should be scrapped for government-recognised startups,” said Sachin Taparia, founder and chairman, LocalCircles, a social media platform. “And to do the same, startups are also willing to submit a set of 4-5 documents which can easily help DIPP and CBDT differentiate them from shell companies but this devil of angel tax for startups must go away.”
The recent DIPP notification, dated January 16, said that a startup is no longer required to approach the inter-ministerial board. It is required to apply to DIPP in the given form submitting the prescribed documentation. The DIPP will pass on the application to the CBDT. The CBDT will be required to communicate its decision to either grant or reject the approval within 45 days of receiving the application from the DIPP.
IVCA members had in January also met Ramesh Abhishek, secretary and Anil Agarwal, joint secretary with DIPP to discuss angel tax on startups.
IVCA members said the exemptions weren’t enough. Members representing IVCA proposed that rather than the current method prescribed by the government to seek exemption from angel tax, a blanket exemption be introduced.
IVCA suggested this should apply to all startups that have raised funds up to ₹10 crore. The recent clarification by the government would not impact the past cases where notices have been issued.
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