Draconian Angel tax is torturing startups: Killing genuine innovation and must go back

Conducive infrastructure and encouraging policy play a pivotal role in shaping the success of startups in developing economies such as India. While the government claims to have been encouraging startups through several schemes, such things appear hollow in the wake of draconian Angel tax and its impact.

For the past several months, startups have been receiving notices to pay additional tax or premium on a higher valuation. Angel tax is a 30.9 percent tax levied on investments made by external investors in startups.

Startups are forced to pay tax on the amount that is considered above ‘fair value’ valuations. The fair valuation is evaluated on the basis of discounted cash flows which doesn’t account intangibles like goodwill or even actual IP,  forget market potential or disruptive potential.

Many entrepreneurs have been tortured by the taxman over exorbitant Angel tax which is nothing less than startup killer.

Startup founders in Bangalore who are getting notice for angel tax, please DM me. Please retweet.

— Abey Zachariah (@abezack) December 17, 2018

Since angels invest at a very early stage, startups’ valuations largely evaluated on mutual agreement and understanding between founders and angels.

But Income Tax is far from understanding the basic principle of angel funding and calculation of valuation. This obstinate behaviour of the tax-collecting agency has disappointed angel community as it’s strangulating startups.

This has got to stop! We are going to end up destroying the most promising startup community in the world. https://t.co/GwikmTWR43

— Kunal Bahl (@1kunalbahl) December 17, 2018

Several entrepreneurs who had to shut down their startups are now being harassed by IT Department over high valuation. “We just had an Appellate Tribunal hearing last week. No great hopes though.... keeping my fingers crossed!!,” read a tweet (refer first Twitter thread) from seemingly a startup founder.

Besides IT Department, MCA had notified to over 2,000 startups that have raised investment in the last five years. It has given a 45 days deadline ending in the January first week (2019).

It’s worth noting that govt declared no Angel Tax will be levied up to Rs 10 crore funding raised by a startup.

If the government doesn’t want every worthwhile startup to escape out of the country to more hospitable regimes like Singapore, or worse, sell out cheap, they really need to consider the axe that is the angel tax. Because it’s an axe that is chopping off India’s own startup tree.

Angel tax is undoubtedly one of the best things government can do for killing startup culture in India. The government must abolish this absurd taxation on startups and we as a community must stand up against it. Let’s unite and make the government roll back angel tax which is killing the genuine spirit of entrepreneurship.