Abolish angel tax in budget and why
Angel tax has been the single biggest bane that startups are facing today and it has the potential to completely upset Prime Minister Modi’s grand vision of Startup India. Simply put, if a startup raises capital from residents at a premium against the fair market value of its shares, the capital thus raised is treated as “income from other sources” and the startup has to bear a tax of 30.9 percent on the premium amount raised. Startup founders are up in arms against this ruling even as several startups have received the Income Tax departments’ notices to pay taxes for funds raised. Even if a startup wishes to appeal, it has to be done within 30 days and after mandatorily paying up 20 percent of the demand amount.
While the intent of this ruling is to discourage benami money from entering the startup ecosystem, it is flawed at its core. The essence of Startup India is inclusiveness, in that it encourages entrepreneurship across society. However, angel tax is actually exclusive in nature because it ends up penalising the entire ecosystem in an attempt to net a handful. In practice, the issue stems from the different valuation methodologies used at the time funds are raised, and the disconnect in the understanding of capital raised from external sources and revenue earned between startup founders and investors on the one side and the Income Tax Department on the other. The ruling is a double whammy for the ecosystem.
Startup founders will find it increasingly difficult to raise capital to scale businesses especially at an early stage and those who manage to do so will be slapped with tax notices. This perhaps explains the dip in angel and VC investments in 2017; there is likely to be a further dip if not corrected in the Budget this year.
The last thing the government wants is to encounter is a “brain drain” situation, wherein startup founders are forced to move abroad to greener tax pastures as a result of this tax. more
While the intent of this ruling is to discourage benami money from entering the startup ecosystem, it is flawed at its core. The essence of Startup India is inclusiveness, in that it encourages entrepreneurship across society. However, angel tax is actually exclusive in nature because it ends up penalising the entire ecosystem in an attempt to net a handful. In practice, the issue stems from the different valuation methodologies used at the time funds are raised, and the disconnect in the understanding of capital raised from external sources and revenue earned between startup founders and investors on the one side and the Income Tax Department on the other. The ruling is a double whammy for the ecosystem.
Startup founders will find it increasingly difficult to raise capital to scale businesses especially at an early stage and those who manage to do so will be slapped with tax notices. This perhaps explains the dip in angel and VC investments in 2017; there is likely to be a further dip if not corrected in the Budget this year.
The last thing the government wants is to encounter is a “brain drain” situation, wherein startup founders are forced to move abroad to greener tax pastures as a result of this tax. more
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Angel Tax if not MANDATED, there will be Quid Proquo pre set for permanent ways that makes the Shareholders other than promoters lose continuously . Indeed, Premium on Shares shall be only after Analytical Verification and Certification by the Zonal Registrar of Companies concerned that confines to the practical recognition of the Share Value in terms of definite and increasing Profits from that Business Product . more
Feb 01
Abolishing Angel tax would only lead to more Robert Vadra's benefiting from the system through benami money. I find nothing wrong with Angel tax. I have been associated with 3 startups and I do not understand how someone who understands finance would actually pay more than the valuation price, for the equity. And if the startup is greedy enough to go for such funds, I see no reason why it should not be punished. This has nothing to do with innovative ideas and entrepreneurial spirit. With this tax in place, the process of valuation and fund raising would be more transparent. As such the valuation of most startup is highly inflated for the so called "ideas". If you know of a specific case, where it worked against the start up, please share and we can discuss. more
Feb 01
Dear Naveen Goel, I am not in agreement with you on Angel Tax. This must be imposed on any company if you get overwhelming investment in the company in-proportionately. This will make a route for Black Money investment. more
Feb 01
