Stakeholders of the startup ecosystem have been fearing severe implications of draconian Angel Tax and related laws for over the past couple of months. Sensing backlash, the government has promised not to torture startups over section 56 and 68 of the Income Tax Act – notably taxes to authorise assessing officers of taxing valid legal Angel money invested into startups.
However, like several commitments of government, the commitment of giving relief to startups over Angel Tax appears hollow.
In a very unfortunate incident, Income Tax department had frozen four bank accounts of TravelKhana (Duronto Technologies Pvt Ltd) and withdrew about Rs 33 lakhs on a pretext of tax liability on investments raised by the company from Angel investors.
“We had raised investment from several angel investors in the FY 2015-16. Since past several months, Income Tax department has been asking certain set of questions over raised amount including the validity of the investors under Section 68. We were duly answering their questions and complying with the legal process including sharing that we were a startup being pioneers of our field and having some very reputed and respected investors,” said Pushpinder Singh, Founder, and CEO, TravelKhana.
Despite the process going on, the Income Tax assessment officer passed an assessment order asking TravelKhana to pay taxes on the Angel money received for which shares had been issues and filings with the Ministry of Corporate Affairs as well as RBI done.
“We had appealed against the order and put in multiple requests for abeyance with the assessment officer on 15 January 2019 and again on 4 February 2019. Without accepting or denying our abeyance request and totally against the principles of natural justice and government assurances on no coercive actions, the IT department froze our bank accounts and withdrew all money in all the accounts in various banks striking a death blow to the company and the several employees and small businesses associated with it,” added Singh.
Income Tax had asked TravelKhana to pay Rs 2.33 crore as Angel Tax. “Following the assessment order, we appealed to IT department for relief, In parallel we also requested assessment officer to keep the order in abeyance on January 15,” said Singh.
Almost 20 days later, Singh again appealed to assessment order on February 4 through lawyer outlining that matter is very critical and is a question of survival for the firm. “The very next day IT department froze one State Bank of India and three ICICI bank accounts containing Rs 33 lakhs,” added Singh.
Following the freezing and deduction of amount from bank accounts, Singh and his team approached senior IT officials. However, they denied any immediate relief and asked them to appeal which we had anyway started the process“. Appeal in normal times takes at least a year to resolve.” emphasized Singh.
The only relief Singh and his company received from CBDT is that bank accounts are operational and an early hearing of the appeal. However the earliest to expect will be not less than 3 to 6 months but nothing left for transactions, pay salaries or continue running the business.
While Singh’s trouble is an unprecedented, unwarranted, and classic example of harassment, there are many startups who are grappling with a demon called Angel Tax provisions. Only lesson for the government from progressing and contagious startup ecosystem – please support us or stay away. Otherwise, all that is said about hugely marketed schemes like Startup India and Employment is hollow.