Start-ups accredited by DIPP will no longer be asked to pay angel tax

Facing flak from start-ups, the government may announce modifications to the “angel tax” law in the coming weeks. All start-ups accredited by the Department of Industrial Policy and Promotion (DIPP) will no longer be asked to pay angel tax, sources involved in the inter-ministerial discussions said.

Earlier, the rule said only those start-ups that have been given such an exemption by a government board will be excused. That is likely to change as the government is planning to exempt “any and all start-ups” (that qualify as start-ups according to prevailing norms) from the purview of the law.

Further, the government is planning to remove the inter-ministerial board that decides if a start-up is innovative and worthy of tax breaks, and replace it with a body of experts from the Indian Institutions of Technology (IITs) and Indian Institutes of Management (IIMs).

This body will review start-ups’ requests for sops and decide on the issue of fair market valuation of start-ups.

“The (angel) tax — Section to 56 (II) (vii b) — will not be applied to start-ups, flat out,” said a source, who was part of the top-level discussion. “The revenue secretary has assured that it will be done. A directive on this will be issued soon,” the source said.

As of November 23, 14,036 firms are recognised as “start-ups”, according to official figures. The government has also assured internally that no new notices will issued in the interim and that a new mechanism to deal with the ongoing cases will be put in place, another source said.

Last week, the Centre sprang into crisis management mode when start-ups and entrepreneurs raised instances of harassment by the Income-Tax (I-T) department over angel tax, in traditional and social media. Over the last few months, a slew of I-T notices were sent to start-ups, asking them to pay a tax on their “excess” valuations.

“Draconian Angel tax torturing startups: It’s killing genuine innovation @PMOIndia, @narendramodi, @arunjaitley, @sureshpprabhu, @sanjeevsanyal Sir this has started again in big way. Please intervene urgent,” Mohandas Pai, tech veteran and venture capitalist, tweeted. “We have taken up the issue,” Commerce Minister Suresh Prabhu tweeted back.

A day later, on Thursday, the government convened an emergency meeting to discuss the matter. DIPP Secretary Ramesh Abhishek, Central Board of Direct Taxes (CBDT) Chairman Sushil Chandra, and Revenue Secretary Ajay Bhushan Pandey were present in the meeting. Since then, bodies like iSpirit, a software think tank, and Indian Private Equity & Venture Capital Association (IVCA) have made representations to the government on angel tax.

The issue pertains to a 2012 law, infamously termed the ‘angel tax’. According to the rule, for start-ups raising capital at a valuation higher than the fair market valuation, as determined by the tax department, the difference in value is deemed as earning and is taxed at 30 per cent. Investments from Sebi-registered VCs and alternate investment funds (AIFs) are, however, exempted from the rule.

Valuations of start-ups are based on future projections of revenue and user growth. Entrepreneurs, whose companies received these notices, told Business Standard that tax officials were simply not agreeing to their valuation determined by independent chartered accounts or merchant bankers. In some cases, start-ups were asked to hand over financial details of investors. The dual issues, many said, have made is very difficult to appeal against the tax demand.

WHAT GOVT IS LOOKING AT

• Exempting “any and all start-ups” (that qualify as start-ups according to the prevailing definition) from the purview of the contentious law
• Removal of the inter-ministerial board that decides if a start-up is innovative and worthy of tax breaks
• Replacing this board with a body of experts from the IITs and IIMs. This body will review start-ups’ requests for sops and decide on the issue of fair market valuation of start-ups