The Indian government may roll back a tax on angel investments that is said to be hurting the country’s startup ecosystem

(Image source- TnH Global)

  • In the last month or so, India’s Income Tax Department has issued notices to around 150 early-stage startups requiring them to reconcile outstanding taxes on the angel funds they have received.
  • As per the angel tax policy, startups have to pay a 30.9% tax on the positive difference between their valuation post-investment and their FMV, which is classified as “income from other sources.”
  • Following a wave of backlash over this policy, Suresh Prabhu, the Minister of Commerce and Industry, tweeted that the government had “taken up the issue”. The Central Board of Direct Taxation is currently said to be looking into the matter.
In the last month or so, India’s Income Tax Department has issued notices to around 150 early-stage startups, requiring them to reconcile outstanding taxes on the angel funds they have received.

The so-called “angel tax” applies to startups incorporated before 2016. It relates to the discrepancy between the valuation of a startup, once it receives angel investments, and it’s actual “fair market value” (FMV). Income tax officials calculate the FMV using traditional methods such as the discounted cash flow model that doesn’t take into account intangible assets like “goodwill” and therefore, undervalues the company.

As per the policy, startups have to pay a 30.9% tax on the positive difference between their valuation post-investment and their FMV, which is classified as “income from other sources.” Startups incorporated after 2016 under the government’s Startup India programme are exempt from the tax.

Following a wave of backlash over this policy, Suresh Prabhu, India’s Minister of Commerce and Industry, tweeted on 19 December that the government had “taken up the issue.” The Central Board of Direct Taxation is currently said to be looking into the matter.

Prabhu was directly responding to a link to an article shared by Mohandas Pai, the chairman of Manipal Global Education, that referred to the taxation policy as “draconian” and a hindrance to innovation.

However, the Income Tax Department has maintained that it has only sent notices to companies with financial irregularities since the tax is geared towards preventing money laundering and payments to politicians in the form of shares in these unlisted companies.

The angel tax has reportedly deterred angel investors from infusing funds into startups for fear of losing a significant chunk of their investment to the taxman. Entrepreneurs and investors had been hoping for a revision of the policy in the Indian government’s Union Budget for 2018-19 but it didn’t come to pass.

A modicum of relief came in April this year when the government excluded startups from the angel tax in the event that the funds raised from angel investors were ₹100 million or less, subject to the approval of an eight-member ministerial committee.

Speaking on the tax notices issued to the 150 or so startups, an official from the Income Tax Department told the Indian Express that it could pertain to those startups that aren’t registered with the commerce ministry’s Department of Industrial Policy and Promotion (DIPP).


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