Angel tax proves to be a curse for start-ups

■ 73% of the firms earning up to `2cr received tax notices

Governments claim to be start-up-friendly, but start-ups are facing a tough time because of angel tax. Several startups in Telangana state have received notices from the income-tax department.

Angel tax — contained in Section 56(2) (vii b) and Section 68 of the Income Tax Act — is proving to be a curse for start-ups and angel investors. The IT department has allegedly seized bank accounts and withdrawn cash citing tax liability on funds of some start-ups, like TravelKhana and Babygogo, and left them with a negative balance.

The start-ups, including those that have foreign investment, received notices despite being registered as part of Start-up India initiative.

“My start-up was among the first in Telangana state to receive IT notices and there was sudden panic,” said a Hyderabad-based entrepreneur speaking on the condition of anonymity.

“We got notices towards the end of 2018, over investments we raised in 2015-16. They sought a lot of details, even though we were part of the Start-up India policy and registered with the Indian government. They certainly lacked co-ordination among themselves,” he said.

Angel tax was introduced under Section 56 of the Income Tax Act in 2012 to curb money laundering through small companies.

The entrepreneur said tax terrorism was wasting start-up time and said the IT department should have clear directives of how valuation of new generation start-ups is being done.

As per a survey conducted by local circles and the Indian Private Equity & Venture Capital Association (IVCA), about 73 per cent of start-ups that raised capital between `50 lakh and `2 crore have received angel tax notices.

According to unofficial estimates at least 150-200 start-ups in Telangana state have received the notices.

“We received the notices. There was confusion on the source of our funds,” said Mr Abilash Inumella, another entrepreneur. “We had a few meetings with the IT officials, who understood our argument. For the kind of investment our start-up got, it is not angel tax but different rules that apply to us.”

Entrepreneurs allege that this has forced many angel investors to shy away and prevent people from coming forward. They point out that during discussions with officials, the methodology of valuating start-ups was different and there needs to be coordination.

Entrepreneurs in the city who sold their startups also received notices.

“There is too much paper work and waste of manhours, both of which are crucial for start-ups,” said Mr P. Sainath Gupta of PrimeTrade.ai.

“In countries like Switzerland, laws are clear and there is no scope for multiple interpretations as a nodal officer is easily reachable to clarify doubts. In India, there is lack of clarity.”

Mr Gupta said, “When you are trying out new things, applying an older law is only going to stifle growth. Start-ups are tough enough with percentage of failure rate. Besides, we have less money. The money we pay a CA or lawyer to get legal advice/interpretation of law could easily have been used to hire a full-time employee, which can be more productive.”

The government, while planning to resolve angel tax problem, is cracking down on companies by deducting money from their accounts.

Mr Pushpinder Singh of TravelKhana took to Twitter on finding that `33 lakh had been deducted from his account. “It is true (the IT department froze the bank a/c and withdraw money). The bank manager said that 4 IT inspectors came and forced the bank manager to make DDs from all accounts. This was investment money for which shares were issued and filings done with Registrar of companies and RBI (sic),” he said in the tweet.