Direct Tax Services
Select Your Location
India is the second-biggest hub for any startup to grow and set up its business. The Indian government is also promoting such startups and entrepreneurship in the country. Recently, angel tax has been in the news which is levied on angel investments in startups. The tax notices are issued to a large number of startups and hence such sector demand remedies.
In this article, we will explain more about the India Angel tax mechanism and its effects on the startups.
Table of Contents
Angel tax refers to the income tax payable on capital raised by Angel Investors which are basically unlisted companies via the issue of shares where the share price is seen in excess of the fair market value of the shares sold. One of the difficult tasks for startups is to obtain funding. Normally the startups receive money only from friends and relatives. However, there is another class of investors who provide funding to these startups organization. They invest in companies which are in the early stage of development. These investors act same as the Venture Capital function. Hence these investors are named as “ANGEL INVESTORS”.
The Angel Investors take the risk of investing in Startups which in turn the government provides them various tax breaks for investing in startups. The United States has provided the Angel Investors the benefit of reinvesting the profits generated from one Startup to another startup. However, this facility is not provided in India. Angel Investments has not received much importance in India, the reason is that no special tax breaks are provided to the Angel Investors.
As per the latest Tax Laws the startups have to shell out 30% of the funding which they receive from Angel Investors as tax under the head “Other Sources Income” and will the taxed at the maximum rate. This demoralizes the Startups. Facing such issue, the Startups and the Investors have collectively filed an online petition to pressurize the government to abolish the taxes.
Black Money is the biggest problem that India is facing. Also, out of the large population, only a few people are doing tax compliance. Presently around 2% of the population pay income tax and do their compliances properly. Thus, the Tax Department is worried if they support Angel Investment which will, in turn, increase money laundering.
Mostly the startups have their assets which are off the books of the company which the investors are aware of as such they provide them with high valuations. In this situation, the startups defend themselves by saying that by obtaining higher valuations they do not become an offender and it is not a crime. Also, they believe that they are not involved in any kind of money laundering nor they are involved in any case of tax evasion.
Due to these flaws, the tax department is of the view that the valuation of the startup’s companies has to be done by the specialist which is to be based on the predefined formula. This is will enable to calculate the valuation of the assets of the startups on the fair value basis. However, if the value exceeds the fair value then it will be subject to the highest level of taxation
The government of India has introduced this concept of Certified Innovative Startup which basically is a startup which has received certification as per which they are not subject to draconian angel tax which is torturing the startups and killing genuine innovation.
Thus, getting a certification is not an easy task. The Startups have to follow certain stringent parameters to get the certification:
For Example, A Company willing to apply for Certification must:
As a result, approximately only 5% or fewer startups apply for certification and are able to get it. Now we understood the crux of the Angel Tax let me take you through the effects of Angel tax on startups.
See Also: All Types of Income Tax Return Filing In India.
The Government of India is continuously engaged in addressing the issues which are faced by the Indian Startup Ecosystem.
As per the notification issued by the Department of Promotion of Industry and Internal Trade (DPI) in April 2018 for easing the norms for providing tax exemptions to startups which were further amended on 4th February 2019.
As per the amended notification, an entity will be considered as Startup:
Provided that in case the approval is asked for offers as of now issued by startups no application will be made whether appraisal request has been passed by surveying officer for the important money-related year.
The application, accompanied by the documents specified therein, shall be transmitted by the Department of Promotion of Industry and Internal Trade to CBDT along with the necessary documents. CBDT within 45 days from the date of receipt of application from DPI may grant approval to the Startup or decline to grant such approval.
However, the Government has not conducted any survey to assess the adverse effects of angel tax on the Indian startup ecosystem.
See Also: The Amazing History of Income Tax in India- Read Now.
Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.
Many investors use fixed deposits as their primary investment vehicle. Investors with a high-ri...
The main idea of CDS, which was initially to give banks a way to transfer credit exposure, has...
Black money has been the subject of heated political debate in India for a long time. Successiv...
The Apex Court pronounced a judgement in the case titled Tata Motors Vs The Brihan Mumbai Elect...
Since economies are moving towards digitalisation and making it feasible to conduct transaction...
The Alternative Investment Funds (AIFs) Pro-rata and Pari-Passu Rights Proposal Consultation Pa...
The Financial Action Task Force, i.e. FATF (the Force), is the global money laundering and terr...
Advance tax refers to the payment of the tax liability before the end of the relevant financia...
On 11.12.15, the Hon’ble Delhi High Court (HC) pronounced a landmark judgement in the case ti...
Money laundering can be defined as the process of illegal concealment of the origin of money ob...
Are you human?: 3 + 3 =
Easy Payment Options Available No Spam. No Sharing. 100% Confidentiality
In this article, we will discuss how the amount of Income Tax is scrutinized. But are we aware of the actual meanin...
21 Dec, 2018
The Income Tax Appellate Tribunal, most commonly referred to as ITAT, is a quasi-judicial body with the specializat...
31 Oct, 2022
Red Herring Top 100 Asia enlists outstanding entrepreneurs and promising companies. It selects the award winners from approximately 2000 privately financed companies each year in the Asia. Since 1996, Red Herring has kept tabs on these up-and-comers. Red Herring editors were among the first to recognize that companies such as Google, Facebook, Kakao, Alibaba, Twitter, Rakuten, Salesforce.com, Xiaomi and YouTube would change the way we live and work.
Researchers have found out that organization using new technologies in their accounting and tax have better productivity as compared to those using the traditional methods. Complying with the recent technological trends in the accounting industry, Enterslice was formed to focus on the emerging start up companies and bring innovation in their traditional Chartered Accountants & Legal profession services, disrupt traditional Chartered Accountants practice mechanism & Lawyers.
Stay updated with all the latest legal updates. Just enter your email address and subscribe for free!
Chat on Whatsapp
Hey I'm Suman. Let's Talk!