Terming the impact on startups ‘dire’, iSPIRT claims that the number of angel investors has fallen 48% from 2015 due to the angel tax issue.

Startups write to PM Modi seeking immediate action on angel tax issue
Atom Angel Tax Wednesday, January 16, 2019 - 18:18

With the issue of Angel Tax plaguing startups in the country, Indian Software Products Industry Round Table (iSPIRT), a think tank for India’s software products industry wrote to Prime Minister Narendra Modi on behalf of Indian startups seeking support and immediate action on the Angel Tax issue.

In a letter titled ‘Grave situation facing startups on the Section 56 (2)(viib) “Angel Tax”, the think tank said that despite the immense strides Startup India has made, the issue of Angel Tax has greatly shaken the confidence of these startups.

“As per surveys conducted by LocalCircles, over 2,600 startups have gotten such IT notices in the last year. This single angel tax issue is undoing all the good of Startup India,” it wrote in the letter.

iSPIRT says that angel tax is being used to target startups who have raised capital from Indian investors though it was put in place to prevent the conversion of unaccounted funds via high share premium. And while startups are raising funds with valuation reported prepared as per the law, it claims that assessing offers are disregarding these valuation reports and methods chosen in favour of alternate methods, which are more favourable to tax officers.

“The choice of valuation as per the Income Tax Act 1961 is up to the assessee, but the tax officers are substituting the Discounted Cash Flow valuation method for a book-value method, the latter of which is not suited for these startups,” the letter said.

Terming the impact on startups as ‘dire’, it said that the number of angel investors has fallen 48% from 2015 and the total amount invested into such deals has also fallen 21%. Further, several startups are considering closing their business and creating companies in places like Singapore to avoid such issues, it claimed in the letter.

Having faced slow progress on action from various officials from Central Board of Direct Taxes (CBDT), Department of Industrial Policy & Promotion (DIPP), Ministry of Finance and Niti Aayog, iSPIRT has recommended that the CBDT issue a circular before the budget with the following points:

Investments received by a startup, as recognized by DIPP from resident investors up to Rs 10 crore per year should be exempt from the section 56 (2)(viib) and section 68 of the Income Tax Act.

As per the Section 68, if a startup is unable to explain the source of capital raised or gives an unsatisfactory explanation to the Assessing Officer, the funds raised can be taxed.

The committee proposed to be formed by DIPP on this issue should look into the open cases and assess by March 31, 2019 to see if the valuation report is reasonable.

iSPIRT also wants all ongoing appeals on the issue of angel tax to be time-barred and closed by March 31, 2019 without having to pay 20% deposit to obtain a stay order.

With the interim budget around the corner, iSPIRT has also recommended a few modifications to be made to section 56 (2)(viib) and section 68. Apart from the exemption it spoke of earlier, it wants an accreditation mechanism for angel investors called ‘accredited investors’ to be implemented. And for investments made to DIPP-recognized startups, iSPIRT wants the accredited investors to be exempt from the section 56 (2)(viib) and section 68.

The letter, addressed to PM Narendra Modi, on behalf of the Indian startup community has been signed by nearly 70 entrepreneurs.

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