Startups upset over IT notices on investments, angel funding falls over 50%

During Startup Indian event last year, the government announced that startups will be exempted from paying income tax for the first three years. However, newly launched startups have been receiving notices from Income Tax (IT) department.

Raising the issue to Minister of Finance and Corporate Affairs, Arun Jaitley, ex-Infosys board member Mohandas Pai, who has invested in a number of startups, complaint about the IT department action.

"Sir Start-Ups are getting harassed by IT for raising Capital, threatening to consider it as income!very bad scene and very many are angry and upset, may shift overseas. Appeal process broken, takes 15 years," tweeted Pai asking for intervention.

@arunjaitley Sir Start Ups are getting harassed by IT for raising Capital,threatening to consider it as income!very bad scene and very many are angry and upset,may shift overseas.Appeal process broken, takes 15 years. Pl intervene, @PMOIndia @narendramodi @amitabhk87 @rsprasad

— Mohandas Pai (@TVMohandasPai) December 19, 2017

Many startups recently complained about getting notices from IT department post raising angel investment. A tech startup founder on the condition of anonymity said
his firm got IT notice for valuation and funding raised last year.

Entrackr detail questionnaire regarding the development to Commerce Minister Suresh Prabhu remain unanswered at the time of writing this post.

Angel tax was introduced in 2012. Under the tax policy, any investment raised from domestic angel investors above the fair value of a venture as determined by the Central Board of Direct Taxes (CBDT) will be taxed as income in the hands of the startup. The applicable tax rate is 30%.

Taxation brings angel investment down 

Investment in startups, especially angel funding has witnessed down over 50% in the first half of 2017. According to the CBDT, unaccounted money is black money that is sought to be turned into white. Last year, the government came out with a notification that startups were eligible for an exemption from this tax.

However, there is a lot of confusion regarding the policies raising a question on valuation. "The department has every right to question the legitimacy of the money but not the valuation," said Pai.

For startups, the money raised is often critical given the early stage it is in, and when much of it is treated as income, it ends up paying most of it in taxes. An appeal takes 15 years to be decided on and the startup will have to keep spending money on it till then.

Lack of support for early-stage companies, red-tapism deterring companies from either getting started or give up too early. According to a data analytics firm, 212 startups shut down in 2016 in comparison to 140 in 2015.

Government startups policy

Last year in January, Narendra Modi-led government announced many startup supportive policies including the profit generated by start-ups will not be taxable for the first three years. Now entrepreneurs can focus more on their business without worrying about the tax part.

The government cut the patent fees for startups by 80 percent. It declared the setting up of a dedicated fund of Rs 10,000 crore to provide both equity and debt support, with Rs 2,500 crore each year for the first four years.

However, last month, DIPP secretary Ramesh Abhishek in an interview said that the govt have been able to provide $242.7 Mn (INR 1,587 Cr) in funding to startups.

According to an RTI seeking the total amount of investment made by the government in the startups, SIDBI has received only Rs 600 crore. As on August 31, 2017, Rs 623.50 crore has been committed to 17 number of Alternative Funds (AIFs). Disbursement of Rs 68.13 crore has been made by 10 AIFs. These AIFs have invested in 72 startups, the document in Entrackr’s possession outlined.