How can a tax meant to curtail corruption be considered bad? Introduced in 2012, the Angel Tax is being perceived as a devil by Indian startups. Before we get into the reasons as to why India’s Angel Tax is a big deal for startups, let’s understand its meaning first.
Angel Tax explained
When the amount invested by an Indian resident angel investor exceeds the ‘fair value’ of the startup, then this excess amount (and not the entire investment) is taxable at the rate of 30.9%. This difference between the value of the startup and the angel investment amount is to be treated as ‘income from other sources’ and hence is liable to be taxed as per Section 56(II) of the Income Tax Act. The targets of this act are the rich and affluent who might misuse the concept of angel investing to convert their black money into white.
So far so good, isn’t it? But here’s why the Angel Tax is a big deal for startups:
- It is vague and therefore unfair
The ‘fair value’ of a startup is not clearly defined. Only the book value or the discounted cash flows value of the startup is taken into account. It ignores the intangible worth of the startup in the form of goodwill, market reach, etc. Taking just the book or assets value only reduces the market price of the startup which in turn limits the angel investment amount or else the investors are taxed heavily for supposedly over-investing.
- A drastic decline in angel investments
Naturally, angel investments have come down by 50% in 2017 as per a TOI report. This is discouraging for many startups. Angel investment gives the impetus to any startup to eventually become financially independent. A decline in angel investors would surely mean a decline in the number of startups.
- Bad for the Indian economy
Startups are and continue to be a hope for developing our economy and generating new jobs. A decline in the startup sector will only be regressive for economic and employment growth. Moreover, since the tax policies pertaining to startups are relaxed in south-east Asia and the west, many startups may go in for foreign investments or even set up their ventures abroad. This can affect the Indian Rupee value.
- Very limited exemption
Only the companies that come under the Startup India policy and under the category of “innovative” startups are spared from this tax. But there are many restrictions for an innovative startup too – it has to be recognized so by the Inter-ministerial Board of Certification, its turnover should not exceed 25 crores, etc.
There is a ray of hope though with the recent announcement by Amitabh Kant, NITI Ayog CEO, about formalizing the conditions of the Angel Tax soon. Till then, the IT officials have been told not to take any rash decisions concerning startups.