Angel Tax: what happens to startups who have already been issued notices?

Investors and entrepreneurs welcomed the government's new notification on Angel Tax, but also sought more clarity on what would happen to the 2,000+ startups who had already received notices from the Income Tax Department.

Siddarth Pai, Co-founder of 3one4 Capital, welcomed the changes, which allow for a greater number of startups to qualify for exemption, and for a longer period of time. Nevertheless, he also pointed out that the government would need to provide clarifications in a few areas.

Watch the video for Siddarth's take on the latest notification and startups who have already received notices.

Also read: Why the government's latest move is a 'surgical strike' against Angel Tax

Siddarth believes the new norms can be cited by startups as part of their appeals process, if they are registered with the Department for Promotion of Industry and Internal Trade (DPIIT).

The startup community was also eagerly waiting for the government's take on Section 68 of the Income Tax Act, 1961, under which startups have received notices asking them to provide the financial details of their investors to trace the funds received. The matter took an urgent turn when two startups who had been served notices - Travel Khana and Babygogo - saw large sums of money being taken out of their bank accounts by the tax authorities.

The Indian Private Equity & Venture Capital Association (IVCA), a representative body of Alternative Investment Funds (AIFs), said the government’s notification was a step in the right direction but falls short when it comes to providing absolute relief to startups. The body, in a release, said the government had failed to address the Angel Tax issue for startups that had already been assessed under Section 56 and had received assessment orders to pay tax. It also did not address assessments made under Section 68.

The industry body also said that startups that had received investments from AIF Category II and other sub-categories of Category I AIF were still outside the purview of the exemption.

Several investors that YourStory spoke to said startups and investors alike were waiting for the DPIIT and the Central Board of Direct Taxes (CBDT) to issue clarifications in this regard and spell out the way forward.

Siddarth pointed out that the ecosystem had been hopeful of getting two additional provisions in the notification which have not been included: (1) the concept of 'accredited investors', and (2) allow startups to invest in securities and create wholly-owned subsidiaries.

For now, the startup ecosystem only hopes that the government will shed light on the grey areas.

Disclaimer: 3one4 Capital is an investor in YourStory.