[Angel Tax]: Industry bodies make joint appeal to govt to abolish angel tax

The Nasscom, TiE Global, Indian Private Equity & Venture Capital Association, and Indian Angel Network made a joint appeal to the government to provide relief for startups on angel tax provisions. The organisations representing the interests of Indian startups made it clear that there was no systemic menace due to investments made by the angel community.

Four leading industry bodies, including the Nasscom and TiE Global, have made an urgent appeal to Finance Minister Arun Jaitley and Union Commerce Minister Suresh Prabhu to lift the burden of angel tax provisions on Indian startups and abolish it altogether.

In a joint letter addressed to the ministers, the Nasscom, TiE, Indian Private Equity & Venture Capital Association, and the Indian Angel Network, sought "urgent intervention to abolish the tax which is based on mere suspicion that angel investors are investing their undisclosed income. There is no empirical evidence to show that there exists any systemic menace in this regard.”

The startup community is currently struggling with the issue of angel tax, a provision of Section 56(2)(viib) of the Indian Income Tax act, under which the income tax department has sent formal notices to several startups questioning their valuation methodology and demanding taxes be paid on the funds they had raised.

The joint letter by the industry bodies further stated,

“If there is any investor who cannot explain the source of investment, we suggest by all means go after that investor but presuming every investor is paying premium or getting discount should not be deemed criminal and be penalised.”

Last month, the Department of Industrial Policy and Promotion (DIPP) said, it, in consultation with the Department of Revenue (DoR), had put in place a mechanism since April 2018 to grant exemption from the provisions of Section 56(2)(viib) of the Income Tax Act to genuine investors in recognised startups.

At the time, the DIPP also said it has again taken up this matter of issue of IT notices to startups with the DoR so that there is no harassment of angel investors or startups. But despite these assurances from the government, several startups once again received formal notices from the tax department late last year.

In their joint letter to the ministers, the coalition of industrial and entrepreneurial organisations wrote that the angel tax issue has put a dampener on the startup India initiative of the government. They said,

“Unfortunately, the (Start up India, stand up India) programme has run into severe implementation problem especially due to ‘Angel Tax’ imposed by Section 56 of the Income Tax Act, 1956. It penalises angel investors and the start-ups simply because premium is paid or discount given on the sale or purchase of share. Nowhere in the world does such provision exist."

The signatories of the joint letter, which was dated January 7, included Nasscom President Debjani Ghosh, TiE Delhi President Rajan Anandan, IAN Co-founder Padmaja Ruparel, and TiE Bangalore President Ravi Gururaj. In addition, there were also signatories from representatives of angel groups from Mumbai, Rajasthan, and Chennai.