Start-ups are in the process of making a representation to the government over notices from the Income Tax department.
New Delhi: Angel tax is back to haunt start-ups in India — at least those not recognised by the Department of Industrial Policy and Promotion (DIPP) under the Ministry of Commerce and Industry.
A number of start-ups have received notices from the Income Tax department and are in the process of making a representation to the DIPP over the move.
Angel tax is levied on investments made in unlisted firms at valuations considered higher than fair market valuation.
The tax department has defended its decision.
Speaking to ThePrint, a senior I-T official said the notices have been sent only to start-ups that aren’t recognised by the DIPP.
“There may be instances of investments made at very high premiums that are being probed. But this will be only in cases where the start-ups are not recognised by the DIPP,” the official said on condition of anonymity.
He added that there may be instances where the tax department is just completing an assessment in cases where notices have already been sent.
‘Destroying start-up community’
Many start-up founders took to microblogging platform Twitter to express outrage at the return of angel tax notices. These include Goodbox CEO Abey Zachariah, Healthier co-founder Rajesh Sawhney and Snapdeal founder Kunal Bahl.
A friend may have to shut down his company as he got an angel tax notice. Angel tax is startup killer.
— Abey Zachariah (@abezack) December 17, 2018
Hundreds of startups across the country are being targeted for collection of draconian angel tax.
Request @narendramodi to intervene and save the startups of India @TVMohandasPai @amitranjan @amitabhk87
— Rajesh Sawhney (@rajeshsawhney) December 18, 2018
This has got to stop! We are going to end up destroying the most promising startup community in the world. https://t.co/GwikmTWR43
— Kunal Bahl (@1kunalbahl) December 17, 2018
Draconian Angel tax torturing startups: It’s killing genuine innovation
@PMOIndia @narendramodi @arunjaitley @sureshpprabhu @sanjeevsanyal Sir this has started again in big https://t.co/hwFttS1aZi intervene urgent https://t.co/a63XKp4sIa— Mohandas Pai (@TVMohandasPai) December 18, 2018
On Tuesday, True Elements co-founder and chief operating officer Sreejith Moolayil tweeted that a group of 70 founders is seeking an audience with the DIPP to make a representation.
As outrage intensified, Commerce and Industry Minister Suresh Prabhu intervened. “We have taken up the issue,” he tweeted.
We have taken up the issue https://t.co/N14IZm8gVY
— Suresh Prabhu (@sureshpprabhu) December 18, 2018
The root cause of the notices seems to be the narrow definition of start-ups put out by the DIPP in April that excludes many from its ambit.
An entity is considered a start-up up to a period of seven years from the date of registration if it is incorporated as a private limited company or as a partnership firm or a limited liability partnership.
Further, the turnover of the company should be less than Rs 25 crore in any of the seven years.
Start-ups are hoping that the angel tax issue is resolved permanently this time around, rather than bringing in any stopgap measures like taken by the tax department earlier this year.
Also read: Before breaking even, these Indian start-ups are breaking taboos
Provision used against start-ups
The notices from the tax department, invoking Section 56 (2)(viib) dealing with angel tax on start-up companies, come even after assurances from the government that genuine start-ups won’t be questioned.
The tax department had even issued a circular earlier this year to cease any further action against start-ups.
Though introduced in the Finance Act, 2012 as an anti-abuse provision to stop corrupt politicians from floating unlisted companies and then issuing shares at a high premium to accept bribes, the provision has been used against start-ups.
Valuations of start-up companies are generally high owing to market potential and the novelty of their idea, bringing them on the tax department’s radar and a levy of 30 per cent tax on investments made by external investors.
On Tuesday, industry leader and chairman of Mahindra group, Anand Mahindra, also said the move goes against the tenets of government’s ‘Startup India’ initiative.
“It needs immediate attention or else all chances of building a rival to Silicon Valley in India will be lost,” he wrote on Twitter.
I have to admit I didn't know about this but it certainly goes against all the tenets of #StartupIndia It needs immediate attention or else all chances or building a rival to silicon valley in India will be lost… https://t.co/qOD0rHB3G3
— anand mahindra (@anandmahindra) December 18, 2018
Also read: Top angel investor & former IRS officer says civil servants throttling India startup scene