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Angel Tax

Do you think raising angel money was tough, then wait until you get a Angel Tax notice!

Angel Tax

When we raised our angel in early 2015, we never thought we would be sitting and documenting the annual income and net worth of the investors one day. We also never thought raising money was easier than convincing some random Income Tax (IT) official on the logic of valuation.

All of that and more which none of the founders were prepared for happened with us and several hundred of other founders in last one year.

This is ironically in contrast to what our Honourable Prime Minister envisaged and wanted to happen under Startup India. But that is the sad reality on the ground. Founders get notices from IT department questioning, why a company which has negligible assets & revenue is being valued at a premium.

The learned folks at the department powdered with the 2012 amendment of IT act, which was drafted to keep Raja/ Reddy’s/ Marans at bay are looking at all big-ticket transaction as possible money laundering instance.

Startups on other hand have raised money on a story and valued on the potential of that story is fumbling to justify in front of officers who don’t understand the fundamentals of Discounted Cash Flow (DCF) valuation. For them, share premium becomes a bad word and founder becomes a crook. But the reality is 90 per cent of founders who raised angel end up looking for a job within the first three years.

As such all the members of the ecosystem has been in dialogue with the government in making them understand the way startups raise – function – scale. For the last 14 odd months, we have had various discussion at various levels over draconian Angel Tax. The good part is the bureaucrats has been listening and coming out with various guideline documents, but the bad part is we still don’t have a solution.

According to Angel List data, angel activity in the country is down by 37 per cent, about 67 per cent startups have received one or other notices from IT & startups graduating to series A round is down by 20 per cent in last one year. These are alarming statistics for a country whose biggest challenge today is creating jobs.

What does the system want:

  • Founders to take an approval before angel funding from government
  • Startups to collect and share the ITR’s and net worth details of investors
  • Founders to only take money from people whose net worth is more than 2 crore & with an annual income of Rs 50 lakh per annum.

In reality, founders at angel round are in most cases have very little option. They don’t have time beyond two-three months to survive and investors are investing after knowing the chance of survival is just 10 per cent .

The latest notification which came on 16th January as an amendment to April 2018 guideline is no different. That has

  • Further reduced the number of people who can invest on the basis of income limit of > Rs 50 lakh. While in reality, most angel investors are family and friends OR industry veterans who are retired and investing from their savings
  • Required founders to share the investor worthiness directly or through them and wait for approval from the government  

This as a process which has been with DIPP (Department of Industrial policy and promotion) and now moved to CBDT (Central Board of Direct Taxes) as per latest notification is the reason for the drop in angel funding.

Thanks to this startups are registering themselves in Singapore and bringing in money to India via that route. That is what Flipkart did and hundreds of other well-oiled companies are doing. It is high time the officials do whatever it takes to “Make in India” a real possibility rather changing that to “Make in India, spend & tax outside India.”

In plain language what we want is:

  • All DIPP registered startups to be exempted from Angel Tax
  • The responsibility of startups should be just to declare the fund raise and share the PAN details of the investor. Current notification expects startups to share details and seek permission, which was the practice in pre 90’s license raj
  • Let there be no discrimination on who can invest on the basis of income. If at all there has to be a criteria, it must be just an accreditation of an investor something like what SEBI does for VC’s

Historically, India was the country that was ahead of the world for many centuries because it granted liberty and freedom to new ideas, art and literature among others. It’s time when we start claiming that spot again from the world. And yes, we can do it as long as the environment plays an enabler role than a parental role.

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