Will the New Angel Tax Exemption Rules Help Startups?

Recently, the Department of Industrial Policy and Promotion (DIPP) has come up with a less cumbersome way in which startups can claim exemption from angel tax. The exemption is valid for startups that are recognised by DIPP. Also, the combined amount of paid-up share capital and share premium after the proposed issue of share for the startup should not be more than INR 10 crores (USD 1.4 million).

In addition, only startups that were incorporated prior to April 2016 will enjoy approval. April 2016 was the original starting date agreed upon for the 3-year tax exemption window policy in accordance with the Startup India policy. According to the new notification, some changes have been made in the angel tax notification that was issued on April 11, 2018. However, is this exemption truly being welcomed by startups?

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Sandy Mallik, Head of marketing for India and Emerging Geographies at PTC, sees the move as a useful one for the startup industry. “I think the tax exemption for the angel investors is a great move towards not only boosting the startup investment situation but also make it a fair play for the entire investment community. While there are other drivers around skill development that will promote the startup ecosystem, policies that ease angel investments should be a great step to get started,” he told The Tech Panda.

The new regulation states that a startup can seek to be exempted from angel tax by applying to DIPP with relevant documentation. Applications submitted by startups that are recognised by DIPP will be moved to the Central Board of Direct Taxes (CBDT) with the needed documentation.

The notification says, “CBDT has been mandated to grant exemption approval to the startup for the purposes of this clause or they can decline to grant such approval within a period of 45 days from the date of receipt of application from the DIPP.”

Going forth, the rule, according to which, a startup had to submit a report from a merchant banker specifying the fair market value of shares has also been omitted. Now, only a justification for the valuation of shares is needed in the application, along with available supporting documentation.

Among other rules, a startup is obliged to furnish account details and return of income for last three years. In addition, startups that seek approval for shares that are already issued by the startup, an application shall not be made if the assessment order has been passed by assessing officer for the relevant financial year. There is also a relief for startups that are still in the process but the assessment order has not passed for them.

The rules also say that Angel investors are obliged to share the details of their net worth and return of income. Moreover, for the financial year preceding the year of investment, investors should have a returned income of INR 50 Lakh (USD 70,000) or more.

Also, on the last date of the financial year prior to the year of investment or proposed investment, an investor should be showing a net worth of more than INR 2 Crores (USD 280,000), or the amount of investment made/proposed to be made in the startup, whichever is higher.

Gopal Srinivasan, Chairman, TVS Capital Funds tweeted, “A new benchmark is set in ease of doing business while solving the #angeltax issue by @DIPPGOI  and our champion @rabhishek1982  No committee, no certificate of valuation needed, all previous and future investments covered, startups incorporated before April 2016 also covered.”

The stir against Angel taxes began in November last year when the Ministry of Consumer Affairs (MCA) issued notices to over 2,000 startups, which had raised capital since 2013. Most of the notices were issued to startups whose market valuations had decreased after the initial round of fundraising.

Several startups and entrepreneurs who felt unfairly taxed took up the issue on Twitter, which steadily caught on. Goodbox CEO Abey Zachariah’s December 17 tweet said: “Startup founders in Bangalore who are getting notices for angel tax, please DM me. A friend may have to shut down his company as he got an angel tax notice. Angel tax is startup killer.”

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The tweet led to startup evangelist TV Mohandas Pai (founder of Aarin Capital) to call angel taxes “draconian.” Soon, Anand Mahindra, Biocon CEO Kiran Mazumdar Shaw, Snapdeal founder Kunal Bahl, entrepreneur, investor Rajesh Sawhney, and several others, were debating in favour of exempting angel tax.

In addition, many startups and organisations such as NASSCOM, the Indian Private Equity and Venture Capital Association (IVCA), the Indian Angel Network, software product think tank iSPIRT Foundation, and community social media platform LocalCircles wrote several letters to the Department of Industrial Policy and Promotion (DIPP) and the Central Board of Direct Taxes (CBDT) asking for exemption of angel tax.

However, criticisms have already been voiced regarding the recent changes. IVCA has said that the leeway given is still not enough to help startups and IVCA members have met Ramesh Abhishek, secretary and Anil Agarwal, joint secretary at DIPP for a discourse about the issue. Their suggestion pertains to a blanket exemption rather than what has been proposed right now.

Indeed, not all feel that the move will help. Gaurav Soni, the co-founder of Lean Apps, told The Tech Panda that the move is not all that it seems. “It’s a good move from the government. However, it has a lot of caveats to it. According to the new rules, the angel investor should have a returned income of INR 50 lakhs as well as a net worth asset of INR 2 crores, which is unwise. The investment based on fair value of premium cannot exceed more than INR 10 crores, which again is not fair for the startups. They could have gone with a law that is globally followed in other countries to set a level play.”

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