Start-up investors raise alarm again over ‘angel tax’

The start-up investor community in India has once again raised concerns over the so-called ‘Angel Tax’ with the government, pointing out that if the issue is not fixed India’s dreams of becoming the start-up hub of the world will not be realised.

The Angel Tax, as it has come to be known, forces start-ups to part with a portion of the capital they have raised from investors due to disagreements over the valuation of the company by income tax officials.

The capital is often considered to be income, and start-ups have long been complaining of receiving letters from the tax authorities asking them to pay up. So far, neither the government nor investors has agreed upon a middle ground, causing immense pain to start-ups that have raised money.

“There is no need to get rid of the existing rules, but we do suggest that genuine start-ups backed by established angel investor groups be seen in the same light as venture capitalists,” said Padmaja Ruparel, co-founder and president of the country’s largest angel investment grouping, Indian Angel Network.

The government had put a check on start-ups raising money from angel investors to curb money laundering activities. Unfortunately, the tax authorities, which are not privy to the way startups are valued, are struggling to differentiate between genuine investments and money laundering outfits.

Ruparel’s solution is for the government to adopt the mechanism it uses to verify investments in startups by venture capital firms. Similarly, money coming from established angel networks into start-ups should be exempt from being seen as income. The issue was rekindled when Mohandas Pai, former Infosys CFO and one of India’s most prolific angel investors, tweeted to Finance Minister Arun Jaitley on Tuesday urging him to act in favour of startups in the country.

“...start-ups are getting harassed by IT (Income Tax Department) for raising capital, threatening to consider it as income! Very bad scene and very many are angry and upset, may shift overseas,” Pai tweeted. This year, angel investments and seed funding deals have fallen by 40 per cent, ringing alarm bells amongst the start-up community in India. While a large part of the fall can be attributed to the end of a euphoric period in 2015 and 2016 where startups raised money too easily, the Angel Tax is to blame too.

While some have asked

The govt had put a check on start-ups raising money from angel investors to curb money laundering activities

for the government to continue with existing laws and figure out a better way to exempt money being invested in start-ups from legitimate sources, others argue that laws for start-ups cannot be so damning.

Instead of a blanket ruling that makes it harder for start-ups to raise money, laws should prevent and punish people who use start-ups as a way to launder money. Several investors feel the government has taken the easy way out by implementing the Angel Tax while not really putting in place any mechanism for genuine start-ups to navigate the red tape.

Pai added that around this time of the year many start-ups would begin receiving notices from the IT department questioning their investments. “Under Section 56 of the law, the IT officer has to be satisfied with the valuation, but they do not always have the investment background to do so,” said Pai.