An­gel tax proves to be a curse for start-ups

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

Deccan Chronicle - - City - NAVEENA GHANATE I DC

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

“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.

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