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My Budget 2016 | Removing Angel Tax will help India retain its startups

Speed News Desk | Updated on: 14 February 2017, 5:46 IST

Indian startups have huge expectations from the Union Budget 2016-17 - including concerns regarding income tax and capital gains tax.

In order to meet these expectations, the government must address the issue of Angel Tax, which severely affects startups in India that seek angel funding.

Here's a quick refresher. The Finance Act 2012 introduced the concept of Angel Tax under which capital raised by an unlisted company from any individual against an issue of shares in excess of fair market value would be taxable as 'income from other sources' under Section 56 (2) of the Income Tax Act.

This tax is levied on startups that receive funding, based on the perceived difference in valuation of the company. If the perceived difference is 25 per cent and the invested amount is Rs 1 crore, the tax levied will be at the rate of 30 per cent on Rs 25 lakh. The repercussion of this is that startups may be subject to 30 to 33 per cent tax on investments that they receive.

To put it simply, if a startup needs to raise Rs 2 crore, they will actually have to raise Rs 3 crore. Currently, most startup owners fear that if both the company and the investor have agreed on a valuation, the tax department may question that and impose an income tax

This Angel Tax coupled with other regulatory roadblocks have compelled Indian startups in the pre-revenue stage to get themselves incorporated in countries like Singapore and the United Kingdom - which offer tax credits to startups.

The amendment, as proposed in the Budget, seeks to exempt investments made in startups not exceeding Rs 10 crore from Section 56 (2) of the Income Tax Act - provided that such investments are made through registered angel groups. Section 56 (2) will continue to apply to investments made by individual investors who are not yet a part of any organised angel investor group.

However, with the government looking to recognise angel groups as legitimate entities for such investments, individual investors would have the option to create new groups.

In its pre-Budget recommendations for the startup and e-commerce ecosystem, Nasscom too urged the government to exempt startups from Angel Tax along with reducing the compliance burden and reduce cash outflows.

The amendment will be a very positive move in ring-fencing angel investments that are currently taxable under the Income Tax Act. It will also contribute towards accelerating the growth of the domestic angel investor community and prevent the spill over of startups and the critical IP that these startups generate to overseas locations like Singapore and the UK.

- Aritra Das, 29, Legal counsel to startups

First published: 24 February 2016, 5:05 IST
 
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