What is Angel Tax?

It is basically a term used to refer the income tax payable for the start-ups on the capital raised by them, or unlisted companies via the issue of shares through off market transactions.. The rate of angel tax was a hefty 30.9 per cent. This was applied not just to mature private companies, but also to small startups that took early-stage investments from residents in India.

Why is Angel tax in India problematic?

This is the question which would be popping in everybody’s mind.

Well the problem is there is no definite or objective way to measure the ‘fair market value’ of a startup. And as start-ups are the one with the new idea, Investors pay a premium for that idea and the business potential at the angel funding stage. However it seems that tax official’s asses the value of the startup based on their net asset value at one point. Many Startups claims that they find it difficult to justify the higher valuation to tax officials.

As we hear the word tax, so the question arises in our mind, is there an exemption available from this tax?

In fact this year only, government had issued a notification in April to give exemption to start-ups under section 56 of the Income Tax Act in cases where total investments including funding from angel investors should not exceed Rs 10 crore. If start-ups wants exemption, they are also required to get approval from an inter-ministerial board and a certificate of valuation by any merchant banker. However the startup should meet few criteria to qualify for angel tax exemption in India:

• The share premium and paid up capital of the start-up should not exceed Rs. 10 crore after issuing shares.
• The procurement of the fair market value of the startup should be certified by a merchant banker.
• The average income of the investor in the last 3 financial years should not be less than Rs. 50 lakh
• Also the investor should have a minimum net worth of Rs 2 crores.
• The startup should have received approval from 8 member inter-ministerial board for angel tax exemption.

Angel Tax Allowance

To simplify the compliance procedure, in a recent notification the government has completed the requirements of fair market value certificate which is issued by the merchant banker and approval from an inter-ministerial board.  The eligible startup can simply request angel tax exemption from the department of Industry Policy & Promotion (DIPP) with applicable supporting documents. This application of DIPP recognised startups will be forwarded to CBDT (Central Board of Direct Taxes) along with the documents attached and CBDT is also mandated to accept or decline such application within 45 days from the day of receipt.

Is Scrapping Angel Tax possible?

No the angel tax could not be scraped as money laundering is the major issue. And also there is a network of the 200 shell companies and they have been under control since 2012, that’s why it can’t be scrapped.

Angel Tax scenario in India

On Feb 19, the government relaxed norms for companies that qualify as “startups” and can avail angel tax breaks. Now an entity is considered as startups for up to 10 years after its incorporation as compared to seven years earlier. Also the upper limit for turnover of startups in angel tax exemption has been increased from Rs 25 crore earlier to Rs 100 Crore.

“The current law presumes guilt and more often penalises the genuine investor and entrepreneur,” Paula Mariwala, founder and co-president of Stanford Angels & Entrepreneurs India (SAE India), told Quartz. “This has caused irreparable damage to the startup ecosystem in India as angels are putting their money elsewhere and entrepreneurs are having a hard time finding their first cheques resulting in unnecessary road kills of many a good idea.” Mariwala is also a member of the policy team at Indian software products industry’s think tank iSPIRT.

For the Startup founders, venture capital firms and overseas investors are the potential resource of funds and angel investors that make up a small portion of the capital. But who thought, elimination of tax may encourage more participation by local investors and help a rookie entrepreneur make a pitch to ‘the Crorepati next door’.