Budget 2019: Government removes the sting of angel tax, entrepreneurs & investors rejoice
The minister announced that to resolve the issue of angel tax, startups and their investors who file requisite declarations and provide information of their returns will not be subjected to any kind of scrutiny.
“The issue of establishing identity of the investor and source of his funds will be resolved by putting in place a mechanism of e-verification. With this, funds raised by startups will not require any kind of scrutiny from the Income Tax Department,” she said.
Angel Tax, formally known as Section 56 (2) (viib) of the Income Tax Act, taxes funds raised by startups if they exceed the fair market value of the company. It was introduced in 2012 by the UPA government in order to detect money laundering practices and catch bogus startups.
In the past few years, many startups have raised concerns over angel tax calling it an extremely unfriendly and unfair tax as it is not possible to calculate the fair market value of a startup. They have also alleged that to calculate the fair market value, the Assessing Officer (AO) chooses the cash discounted flow method, which is not very startup friendly but suits the tax officers.
Last December, over 2,000 startups in the country received notices to clear the angel tax and some of them were also notified to pay an expensive penalty for not paying the dreaded tax on time.
In addition to this, instead of asking for only the PAN card, IT sleuths have asked for physical copy of IT returns, full bank statements and other important documents from investors, which is usually sought by Assessing Officer (AO) only. This has been considered as a form of harassment by both- the investors and startups who have demanded modifying the tax norms.
Resolving this issue, Sitharaman also announced that startups will not be required to present their fair market value of their shares issued to certain investors including Category-I Alternative Investment Funds (AIF). “I propose to extend this benefit to Category-II Alternative Investment Funds also. Therefore, valuation of shares issued to these funds shall be beyond the scope of income tax scrutiny,” she added.
Saurabh Srivastava, co-founder of NASSCOM and the chairman of Indian Angel Network, has been very vocal on his stand of scrapping the tax altogether. He had previously talked to ET about how this forces the startups to raise 50% more money than they need as 30% of it goes in angel tax. The tax compliances had also led to investors trying to ignore funding in startups involved in the angel tax issue.
Talking about the new measures announced today, the 73-year-old angel investor said, “As per what she has said, the measures announced should eliminate virtually all issue plaguing angel investments in startups. The FM has addressed the harassment of both- startups and the angel investors.”
Agreeing with Srivastava, Deep Kalra, founder and group CEO, MakeMyTrip said, “For the startup and entrepreneurial ecosystem in India, there wasn’t a lot of substantive announcement barring the proposed easing of angel tax for startups that has been detrimental to building a world-class startup ecosystem. The announcement around startups not to be challenged on valuation to determine angel tax is a welcome move and should hopefully reduce litigation.”
Meanwhile, many were impressed with the introduction of the e-verification mechanism. Raman Roy, founder of Quatrro, and popularly known as the ‘Father of the BPO industry in India’ said, “The e-verification mechanism proposed by FM Nirmala Sitharaman is an enabling one for both startups and angel investors. This, coupled with the exclusion of startups and investors who file requisite declarations from tax scrutiny, is an uplifting step taken by the Government. The ‘requisite declaration’ clause, though, requires a closer inspection. In any case, the overall development looks extremely optimistic for the Indian startup ecosystem.”
Speaking on similar lines, Anuj Golecha, co-Founder of Venture Catalysts said, “The government will put in place a mechanism for e-verification to eliminate tax scrutiny around funds raised by startups as well. This will act as a catalyst in driving investment towards our startup segment and promote cutting-edge technological solutions.”
Ravi Narayan, CEO of startup incubator T-Hub, said, “The Budget declaration of 2019 today has opened various progressive scale-up opportunities for startups. One of them was the introduction of the e-verification process for startups when they raise funds will provide a bankable and transparent control to the IT department. However, it remains to be seen how entrepreneurs would make the best use of these gateways provided by our government.”
In the meantime, giving more relief, the Finance Minister proposed to relax some of the conditions for losses incurred by startups. “I also propose to extend the period of exemption of capital gains arising from sale of residential house for investment in startups up to 31.3.2021 and relax certain conditions of this exemption,” the minister said.
In other developments, the government has proposed a television programme to promote funding, growth and promotion of startups. The channel will come under Doordarshan bouquet channels and will be designed and executed by startups. It is aimed for matchmaking of startups and Venture Capitals (VC).