Startups are face-to-face with angel tax, which some say has the potential to derail India’s startup industry entirely. What’s the brouhaha about? Find out here.
What Is Angel tax?
Privately-held companies who receive capital through external investors have to pay angel tax of 30.9%. This isn’t on the total, but on the amount that’s in excess of the fair value of the startup’s valuation. Taxed as ‘income from other sources’, it was introduced in 2012 to curb angel investing from being used to launder money.
Why Is There An Uproar?
Recently, several companies received a notice demanding angel tax of around 30% or more on capital received in the past few years, which is a colossal sum to part with. Also, the definition of ‘fair value’ with regards to startups is ambiguous and subjective as it doesn’t take intangibles into account. As a result, the tax evaluation may suggest that an investment is over the fair value, resulting in a high tax rate. Industry insiders believe that in many cases, evaluators are clueless on how to value startups.
What’s more, many startups—over 14,000—have applied for tax exemption and have received the silent treatment. Angel investors are being questioned too, with notices requesting sources of funds and financial statements.
What Is The Impact?
Startups need every bit of help they can get, especially since finding investors is difficult to begin with and angel tax is drying up their funding. It’s also deterring angel investors, who in other countries are applauded through the tax system for helping startups.
Moreover, it contradicts the Startup India programme and has resulted in mental and financial trauma for entrepreneurs who are at the receiving end. They are now saddled with crippling costs of legal and financial counsel to file an appeal in response to the notice.
While the government has set up a committee to review the situation and grievances of businessowners, as of this moment, it’s all up in the air.
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