A joint survey done by LocalCircles and Indian Venture Capital Association has revealed that the problem of Angel Tax for startups has been quite widespread.
More than two-thirds of startups in India that have raised funding since inception have received notices from the Income Tax Department under the provision of Angel Tax, according to a joint survey by LocalCircles and the Indian Venture Capital Association (IVCA).
The survey revealed that 73 percent of startups that raised capital received one or more 'Angel Tax' notices. Among the startups that received notices, 73 percent had raised capital between Rs 50 lakh and Rs 2 crore, 17 percent in the Rs 2-10 crore range and six per cent under Rs 50 lakh.
The survey was conducted to understand the impact of Angel Tax, a provision under the law which seeks to impose a tax on the investments raised by the Income Tax Department as it treats as income earned by these entities.
The survey received more than 10,000 responses from approximately 2,500 startups and entrepreneurs across the country.
On the question of how many 'Angel Tax' notices were received under 45 percent said one to two notices while another 28 percent said three or more. Only 27 percent said that they did not receive any notice.
Majority of the startups received 'Angel Tax' notices under Section 56 (2) (viib) which comes under the provision of raising capital while six percent of them got it under Section 68 which deals with cash credit. Around 24 percent of received notices under both sections.
The irony is that 46 percent of the startups in the survey that received angel tax notices were incorporated in 2011 or before, 47 percent in 2016 and after. Only 7 percent were incorporated between 2012 and 2015.
The survey reported, “Based on inputs given by startups in various community discussions, it appears that Income Tax systems currently do not have a way of identifying a startup and there is an urgent need to do so."
LocalCircles Founder and Chairman Sachin Taparia said,
“The angel tax should be scrapped for government recognised startups. And to do the same, startups are also willing to submit a set of 4-5 documents, which can easily help DIPP and CBDT differentiate them from shell companies.”
Startups were hopeful that the Budget will get them some respite from the issue or at least a commitment from government to resolving the issue, but it stayed unaddressed in Finance Minister Piyush Goyal's Interim Budget speech.