Govt seeks to soften the blow for start-up busi­nesses

Business Standard - - FRONT PAGE - YU­VRAJ MA­LIK

The rev­enue depart­ment has stepped in to ad­dress the con­cern of start-ups about ha­rass­ment by the in­come tax depart­ment.

The com­plaints re­late to money be­ing deb­ited from frozen bank ac­counts of at least two start-ups.

Rev­enue Sec­re­tary Ajay Bhushan Pandey is learnt to have writ­ten to TiE, an en­trepreneurs’ col­lec­tive, to make a list of start-ups that have re­ceived tax no­tices from the depart­ment.

Once the list is in, the rev­enue depart­ment is plan­ning to in­struct its of­fi­cials to stop the pro­ceed­ings, peo­ple in­volved in dis­cus­sions told Busi­ness Stan­dard.

Just as the dust on the is­sue of an­gel tax was set­tling, fresh trou­ble for start-ups sur­faced. Last week, two start-ups — Trav­elKhana and Baby­gogo — al­leged the I-T depart­ment with­drew lakhs of ru­pees from their ac­counts fol­low­ing a dis­pute over tax claims.

Ac­cord­ing to Trav­elKhana Founder Push­pin­der Singh, the ac­tion was taken de­spite the fact that the com­pany was co­op­er­at­ing with the au­thor­i­ties.

Soon af­ter, the Cen­tral Board of Di­rect Taxes (CBDT) is­sued a state­ment say­ing that the start-up had not replied to a show- cause no­tice in a tax case, and that led to the I-T depart­ment tak­ing ac­tion.

Sec­tion 68 of the I-T Act, un­der which ac­tion was taken, is an anti-abuse mea­sure meant to ques­tion pri­vate com­pa­nies that re­ceive ab­nor­mal or un­ex­plained cash credit into their ac­counts. If booked un­der the Sec­tion, the tax depart­ment can de­mand the de­tails of the ori­gin of cash, the pur­pose of such an in­flow, and fi­nan­cial doc­u­ments of the in­vestor.

The fact that the party un­der watch has to “fully sat­isfy the as­sess­ing of­fi­cer” of the le­git­i­macy of trans­ac­tions has the po­ten­tial to make it a tool of ha­rass­ment.

More­over, in such cases, the “un­ex­plained” cash credit is taxed at 83.25 per cent.

“This has rat­tled a num­ber of startup en­trepreneurs and in­vestors, and the sen­ti­ment (against the govern­ment) has gone south,” said Sid­darth Pai, found­ing part­ner at 3one4 Cap­i­tal, a ven­ture cap­i­tal (VC) firm.

Just as the dust on the is­sue of an­gel tax was set­tling, fresh trou­ble for start-ups sur­faced

“Peo­ple are rat­tled about what they will do with the money in their ac­counts. An­gel in­vestors have gone on record say­ing they will stop in­vest­ing, star­tups are say­ing they’ll move their com­pa­nies (reg­is­tered of­fice) to Sin­ga­pore,” said Pai.

In the case of start-ups that are fac­ing tax de­mands, it gets dif­fi­cult for founders to source sen­si­tive fi­nan­cial doc­u­ments from an­gel in­vestors. This also scares the in­vestor, who be­comes re­luc­tant to do any fur­ther busi­ness with the com­pany, said Pai.

“We have rec­om­mended to the govern­ment that if start-ups tell them (tax of­fi­cials) that they can’t get these doc­u­ments, they may go af­ter the in­vestors.”

In any case, re­cent cases have been a damper for the start-up com­mu­nity as a whole. “I am sus­pend­ing all an­gel in­vest­ing till the time #An­gelTax is abol­ished,” tweeted Ra­jesh Sawh­ney, se­rial en­tre­pre­neur and founder of In­nerChef.

Su­nil Goyal of YourNest, a VC firm, said the whole case was “highly con­cern­ing. We will be very care­ful when­ever in­di­vid­ual in­vestors are in­vest­ing with us be­cause founders’ time is getting wasted”, adding that his firm might “avoid” a start-up where an­gels are in­vestors.

A start-up founder said the fresh in­ci­dents had caused mas­sive un­cer­tainty for the en­trepreneurs. “If one gets a no­tice, one may have to shut shop be­cause a) it’s hard to con­vince the I-T of­fi­cer that our op­er­a­tions, val­u­a­tions, and cash-flow are le­git, and b) if there’s a no­tice, no new in­vestor will touch us. It’s a scary thing.”

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