Government set to bring out circular to resolve angel tax issue, says Amitabh Kant

Relief for angel investors: NITI Aayog CEO Amitabh Kant says the government is formalising a solution to tackle the challenges being faced by investors and entrepreneurs due to angel tax. 

Startup founders were hoping that Budget 2018 would resolve the much-debated angel tax issue, but that didn't happen. However, hope is around the corner as NITI Aayog CEO Amitabh Kant, while speaking at the LetsVenture's annual conclave in Delhi, assured entrepreneurs and angel investors that the government has found a solution to the angel tax problem and that a circular would be issued soon.

Angel tax refers to Section 56 (2) (viib) of the Indian Income Tax Act, 1961, under which Income Tax Authorities are demanding additional taxes from startups who have received funding from Indian resident “angel Investors” at a valuation higher than what can be perceived for an early stage startup venture.

On February 6, 2018, the Ministry of Finance's Department of Revenue sent a circular asking tax officials to refrain from coercive action to recover outstanding amounts and set the deadline for disposal of pending appeals as March 31, 2018.

Addressing a room full of entrepreneurs, investors, and other stakeholders of the startup ecosystem at the LetsIgnite 2018 conclave in Delhi, the NITI Aayog CEO stated that the government and the NITI Aayog remain committed to resolving challenges faced by the startup community and promoting entrepreneurial culture in India. Amitabh Kant highlighted that the government is in detailed consultations with the tax department to resolve the angel tax issue.

“Angel tax has been an issue. The Income Tax Department has issued a circular to all income tax officers not to harass any angel investor; we are in detailed consultations with the tax department to find a solution to this,” he said.

He further assured that the government will soon issue a circular citing that angel investors will remain untouched by the tax department.

“I think we have virtually found a solution. We are almost there, but we will have a circular out shortly to say that angel investors will not be touched by the tax department. We are formalising those issues so that all of you are handheld, all of you are supported, and the angel investment movement continues to grow and flourish in India,” Amitabh Kant added.

Angel tax is a 30.9 percent tax levied on investments made by external investors in startups or companies. To clarify, the entire investment is not taxed – only the amount that is considered above “fair value” valuations of the startup, classified as “income from other sources" under the Income Tax Act of India. The problem arises because startups are often valued subjectively on the basis of discounted cash flows, without taking into account intangibles like goodwill. This can cause differing interpretations of “fair value” and leave startups vulnerable to unduly high taxes because the taxman feels the investment is much higher than their valuation.

The tax dates back to the 2012 Budget when then finance minister Pranab Mukherjee introducted the Finance Act 2012. Taxation is a major thorn in the side for many ventures and has forced many angel investors to shy away from offering financial support to startup dreams.

Angel and seed funding deals halved to 435 in 2017 from 901 in 2016, says a report, while the total disclosed value of these deals fell to $245 million from $374 million. But hopefully this should be a thing of the past, with the NITI Aayog CEO committed to solving the problem.