ANGEL TAX: BLESSING or CURSE
INRTODUCTION
Angel tax, a direct tax imposed on some startups but before we start discussing on Angel tax we need to get back a few steps to understand it in a better way. Startups born from entrepreneurial dreams. Now, who can be a certified startup? If you want to certify your firm as a startup as per Government Of India entrepreneurs needs to match the following criteria:
*Either firm is registered under Company Act 2013 or Partnership Act 1932 or Limited Liability Partnership Act 2008
*The firm should not exceed 7years of operation after it's registration.
*After registration of the firm, the revenue should not exceed 25 crores.
Recently the Government Of India given some relaxation to the firms which we will discuss later.
In recent few decades government also supports these ventures as these startups generate lots of employment opportunities, it helps in capital creation and it also leads to technical advancement. Startup India, Make in India and others are the live example of government to influence and support startup entrepreneurs. But at the initial stage, entrepreneurs face a huge challenge of funding. Banks do not want to fund the as in many cases they are not sure enough about the concept of the venture or they find it much risky. Venture capitalists also deny to support at the founding stage, they want to invest at post launching stage. In this crisis situation, few investors come to give the entrepreneurs financial support. These investors are known as Angel investors. Angel investors are those individuals who have enough wealth to invest in their own capacity or through crowdfunding platforms to bring the capital for the startups and the investments by Angel investors are regulated by SEBI. These angel investors come at a stage when the entrepreneur has been refused by both banks and venture capitalists and in return of the investment they get shares of the startup as per company valuation and their funding ratio. If the value of share received by the entrepreneur is equal to market value then it is perfectly fine but in case the entrepreneur receives the excess value of share than it's fair value then the act of Angel tax comes in. Actually, in many cases, Demons comes in the disguise of an Angel investor to convert their black money into white, thus in the year, 2012 Government Of India introduced Angel Tax under section 56 of the income tax act to curb the problem of money laundering.
ANGEL TAX: ANGEL or DEMON (150-100)*30.9%=15.45. But this Angel tax is not imposed on non-resident or venture capital funds, actually, it is applicable only on the investments made by the resident investor.The government of India also imposed some criteria on investors. An angel investor must match those criteria. For example, A, whose net worth is 50crores, he wants to invest in a startup upto 5crores, he can. But B whose net worth 45 crores he can not invest in a startup 5crore, As angel investors net worth should be 10 times greater than his investment (Ref: https://www.livemint.com/ ).
Previously as per notification by the commerce and industry ministry an angel investor picking up stakes should have minimum net worth of Rs.2 crore and should have average return income not less than 50lakh in last 3years now to give some relaxation government announced an entrepreneur raises Rs 5 lakhs from an angel we investor, the amount will be taxed unless the relatives had the income of Rs 50 lakhs per annum or net worth of Rs 2 crores. (Ref: https://www.financialexpress.com/industry/sme/angel-tax-discussions-underway-over-criteria-for-accredited-investors-says-dpiit-secretary/1508011/ )
Now come to the details of the purpose of Angel tax. Why Angel tax imposed? Angel taximposedn to prevehe mpreventundering and also to identify unexplained cash credits. For example, A is investee and B is an Angel investor with huge black money, B invests his black money in the venture to make the money white. Here Angel tax imposed to prevent money the laundering. Another purpose of Angel tax was to discourage the practice adopted by the taxpayers of subscription to shares of closely held companies at an unjustified premium compared to its fair market value then a notice is sent under section 68 which is for unexplained cash credits, to understand the situation we should go through the case of travelkhana and baby gogo issue, where the income tax department sent them notice and frozen their bank account. Astarc Ventures-backed TravelKhana, which received no response to its appeal against the December tax notice and request for an abeyance order, says its accounts were frozen and Rs 7.5 lakh withdrawn from one of them. TravelKhana, owned by Delhi-based Duronto Technologies Pvt. Ltd had received a notice from the income tax department for the undisclosed amount raised in 2015. As per Pushpinder Singh, co-founder of TravelKhana, the government had frozen three accounts of the company with ICICI Bank and one in State Bank of India. Babygogo, a child healthcare website, acquired by Sheroes, a women career platform, in December 2017, got fewer taxation scars as most of its business takes place through parent company Sheroes’ accounts. Babygogo had received a taxation notice in December for a funding round of Rs 2 crore raised in October 2015. The company received a message that the balance in its account stood at minus Rs 72 lakh after withdrawal by the income-tax authorities (Ref: https://www.indiatoday.in/technology/news/story/angel-tax-bites-travelkhana-and-babygogo-it-dept-forcefully-withdraws-rs-1-crore-from-their-bank-accounts-1452048-2019-02-09 ).
Now startups can avail exemption from angel tax if they go through a specific procedure prescribed by the government. Eligible startups request Department of Industrial Policy and Promotion with application supporting departments, then the application of the Department of Industrial Policy and Promotion recognized startups will be forwarded to the Central Board of Direct Tax along with attached documents and then if Central Board of Direct Tax accepts the application, no angel tax will be charged on that startup. Startups and their investors who provide requisite declarations on their returns will not be subject to scrutiny under the angel tax on the share valuation, investors and their sources of funds will be e-verified, lower scrutiny of valuation by the tax officials has been extended to startups that get funding from alternative investment funds like real estate fund, PE fund, fund for distressed assets. But startups should not purchase immovable assets, transpovehiclescle above 10lakh, loans, and advances to avail exemption of angel tax.
Though the government introduced Angel tax to prevent money laundering, it has some adverse effects. India is one of the biggest startup ecosystems, in 2018 the number of angel investors reduced in a huge number,(Ref:https://yourstory.com/2019/05/angel-investment-india-startup-funding ) which is not a very good sign for the startup ecosystem. As there is the burden of criteria for angel investors it Discourages local small Indian investors, which is another drawback of Angel tax. Startups are starved of capital due to lack of investors, many promising startups with unique ideas may be ruined by this angel tax. Now another issue, valuation of an old firm is easy to calculate but in case of startups it is not so easy, the value in maximum time calculate on rosy future projections, the tax officials may found the share premium high, but how it proves the invested money is black money.
The government wants to discourage misuse of startup funding, it is understandable, it imposes the tax in the hands of the startup, in the form of Income from Other Sources, this is discouraging the newly born entrepreneurs. If the goal is to eliminate illegal funding, should try to trace the transaction back to the investor assessee, and tax the surplus investment in his hand. It will reduce both compliance workload and notices received by startups but also gives them the encouragement that the amount received at higher valuations would not be subject to unfair taxation, and be available for use, in full.
Country is in that high time when we are moving towards greater opportunities for businesses in India in a positive and stable way, through Make in India, establishing a Fund of Funds for startups, few relaxations relating to Angel Tax may help India in building more friendly startup ecosystem and boosting the funding flow, while also promoting healthy practices among investors.
Investors invest a lot of money in startups with huge risk and uncertainty, if we give them a bit of freedom, who knows one day the startup may become one of the highest taxpayers of the country.
REVIEW & RESTRUCTURE
Startups generate employment, it helps in technical advancement and helps in many other ways which actually helps to build a strong economy structure and it can not be overlooked. To help startups in angel tax issues government reviewed and relaxed angel tax to some extent. The age limit of startup increased to 10years which will surely help the startups a lot. And as we discussed earlier the revenue limit was 25 crores to be certified as a startup but now the limit issue is almost axed as the limit increased to 100 crores in case of unlisted firms and in case of listed firms having net worth above 100 crore or annual turn over of Rs.250 crore will be exempted from any such limit (Ref:https://www.financialexpress.com/industry/sme/angel-tax-discussions-underway-over-criteria-for-accredited-investors-says-dpiit-secretary/1508011/ ). In case of startups not recognized by the Department of Industrial Policy and Promotion normal inquiry to be carried out and inquiry only after approval of the supervisory officer. These restructure give breath to the startups for sure (Ref: https://youtu.be/gdigzvUrXvM).
CONCLUSION
In the end, it can be said that this relaxation given by the government is enough to encourage the startups and the angel investors, it will help to prevent money laundering without interrupting the operation of startups. Though few investors and entrepreneurs are not finding it perfect as we know there is a huge amount of black money present in our country, we just can not erase Angel tax from income tax act, as it may help Demons to convert their black money into white. Everything has its own pros and cons like angel tax, we should adjust it in the best possible way to balance it, but it can not be omitted, omitting angel tax may encourage few people to do some financial corruption through startup ventures. By the statements in media of K.Ganesh, investor, Big basket, it is clear that he is satisfied enough with the recent changes made by the government. Likewise, the statement of Rehan Yar Khan, managing partner, Orios venture partners, on media is also clear, he is happy with the restructured angel tax and now he has no complaints against it. So, in general, we can say that in the present scenario both investors and entrepreneurs have no complaints against the restructured angel tax. But we all know nothing can satisfy everyone, for example, Mr.Siddharth Pai, Founding partner of 3one4 capital, his statement on media shows he maybe not quite happy as others as angel tax still exists ( Ref:https://youtu.be/gdigzvUrXvM )now the point is as startups can generate employment, boost technical advancement, can help in capital creation government taking several steps to encourage entrepreneurs and angel investors, restructured angel tax relaxed maximum of angel investors and startup entrepreneurs, as they are finding it much easier. But to satisfy everyone if we demolish the angel tax, it may encourage money laundering. But in the end, time will tell the effects of newly restructured angel tax and we all know nothing is permanent, in future angel tax may go through some more amendments for betterment.
AG
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