Don't kill the startup goose by Angel Tax
Bhumesh Verma 10 Jan 2019

Don't kill the startup goose by Angel Tax

It seems the present Indian government, in its last lap now, is doing everything to wipe out the hopes and promises it had made in the run up to last general elections. It was voted to bring in economic reforms, make India more entrepreneur-friendly, create jobs, facilitate investment and so on. What

After dismally failing to bring back any black money into India or creating jobs, destroying financial institutions one after the other, the government is hell bent to kill whatever entrepreneurial ambitions that (mostly) young Indians are left with. To cover some of the lost ground, the government wants to spend on populist measures. Therefore, the government is desperately seeking funds from wherever – by raiding Reserve Bank of India or levying the so called ‘Angel Tax’.

One reason why the present government won the massive mandate in 2014 was that BJP had convinced India's young that he was going to help them fulfill their dreams of becoming entrepreneurs. His motto of 'minimum government, maximum governance' stood for those values of creating an atmosphere that would unleash private animal spirits.

But four years down the line, it's tougher for young people trying to start their own businesses. Hundreds of startups have been served notices under a section of the Income Tax Act, 1961 which has come to be known as the 'Angel Tax'. The tax, under section 56(2)(viib), was introduced by the UPA government in 2012 supposedly to curb the money laundering menace – implying that it was a device to pass on bribes and commissions in the garb of angel investments and escape taxes.

However, this section was rarely invoked for the fear of disturbing the startup ecosystem by harassing even genuine startups.

The subject section stipulates that if a company has issued shares to an angel investor at a price that's higher than its fair market value, the extra amount received by the company will be taxed at 30.9%.

The problem with this proposition is – the taxman are apt at and fixated with only tax collection, often unable to appreciate working of the startups ecosystem, valuation and dynamics of the game.

Depending on how a startup shapes progressively, subsequent angel investors enter at different valuations..

It is lucrative for tax officials to randomly or selectively the lowest valuation as 'fair market price' and tax the differential amount to their benefit. With limited resources, startups cannot spend time, energy and money in legal fights. Even to begin an appeals process, they have to deposit 20% of the demand, howsoever illogical, unreasonable or arbitrary the demand may be. This deposit itself has potential to stop the lifeline of a startup and pronouncing its premature death.

The government should start differentiating between economic offenders, money launderers and genuine angel investors.

The government has failed miserably on the job front and has lost assembly elections in the Hindi heartland for this reason among others. Squeezing more money from wherever possible is one such way to raise finances to dole out freebies. Targetting startups may be counterproductive. Pray the government does not kill the spirit of entrepreneurship among Indians for whatever it is worth, particularly so when actual employment numbers in India are shrinking.


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