Government of India is deliberating removing tax hurdles for angel investors, who have been struggling with notices, which have inevitably forced them to slow down their investments in the recent months. The move will be a major boost to startups.

Angel tax is a tax on the capital raised by unlisted companies through the issue of shares in excess of their fair market value. The issue of angel tax is a contentious issue for startup, even though it has been 18 months since the government exempted “innovative” startups from this tax. In June 2016, the Central Board of Direct Taxes (CBDT) stated that the capital raised by startups from domestic angel investors will not be taxed as income, even if the value of the investment was greater than the fair market value of the shares. This exemption however was made applicable only to those start-ups which met the conditions laid down by the Department Of Industrial Policy and Promotion (DIPP), which has now made its compulsory for them to be certified as “startups” to avail the exemption. Prior to this, all such angel investments were being taxed at a rate of 30% as income from other sources.

So far however, only 7 companies have been recommended by the department for tax benefits under the startup policy, while there are at least 150 start-ups claiming benefits provided under the policy.

Meanwhile, NASSCOM has argued that the confusion in the tax regime along with the notices to companies that have witnessed their valuations fall when going in for subsequent funding, has lead to a decline in investments by angel investors in the past few months.

The repeated complaints have resulted in the DIPP taking up the issue with SEBI, which has been reviewing some of the rules, a source was quoted saying to the Times of India. Furthermore, the issue regarding tax rules is also being looked into by the Finance Ministry and there have been indications that the issue will most likely be taken up during the upcoming Budget, since the government seems to keen to revive investments in the economy.

The industry has further argued that it is neither easy to determine the valuation of companies based on assets alone, given that intangible assets such as goodwill exist and must be taken into account and nor is it easy to determine a fair market value for them based on discounted cash flows. “Imposing an angel tax on start-ups has a direct impact on them as it taxes investment they have received from domestic investors. Start-ups have no revenues or profits and their valuation is based on potential and promise of the idea and is usually a matter of negotiation between the founders and the angel investors,” an industry source stated.

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