Angel tax row: Govt seeks to soften the blow for start-up businesses

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 start-up 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.

“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, start-ups 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.”