Angel Tax must go, startups await new DIPP-CBDT notification

Seven years ago, India was just about coming to terms with the coal scam and money laundering through shell companies. To counter companies offering shares at high premiums to route funds, the then UPA government introduced section 56 2(viib) under the Income Tax Act, 1961, in 2012. The section sought to tax the high premiums on securities and gave the authorities the right to question the valuation of companies that had received the money.

Seven years later, this rule, when combined with Section 68 of the IT Act, which asks companies to explain any cash credits received, has become the Damocles Sword for startups. And the victims - young companies that raised funds through proper and appropriate banking channels, and were legitimate in their functioning.

Over the last three years, over 2,000 startups have received notices from tax authorities. The government is now believed to be proposing a blanket exemption to startups if they have records from proper banking channels. On their part, tax authorities have maintained that the companies which have been served notices did not have their documentation in order and the assessment officers had valid grounds for issuing notices.

Startups, however, have a different story to tell, as do investors. Some have even put their muscle behind a move to abolish Angel Tax, and are working with the government on what needs to be done.

Earlier this week, we spoke to Siddarth Pai, Co-founder of 3One4 Capital, on Angel Tax.

“It's turned out to be the most difficult time,” he said, adding, “The new notification will provide succour to startups and the government has promised us that.”

Also Read: Government Circular all set to tame angel tax

Here, Siddarth talks about how startups have been harassed under Section 68, which entails collating private documents pertaining to startups’ investors. This has now become a chicken-and-egg situation because investors do not have to disclose their private information such as bank documents, financial statements and even ITR to startups. But the taxman would insist on these documents, and then stop investments being made in the company when the documents could not be furnished.