It seemed that the bogey of the angel tax was refusing to die, its latest appearance being in the form of a renewed batch of income-tax notices to founders of startups seeking copies of tax and transaction details about investments by venture capitalists. This was the second time such notices were being sent out by the taxman since the imposition of a 30.9% tax on investments by external investors in startups. The incidence of the tax—on valuations deemed above fair value—permitted scope for discretion and, naturally, did not sit well in India’s startup ecosystem. The subjectivity creeps in from the manner in which startups are valued—on the discounted cash flow model, which ignores intangibles like goodwill and leads to differing perceptions about fair value. A tax notice can be particularly worrisome for a company still trying to find its feet in a hyper-competitive market. The attention of the taxman would have seriously upset plans to raise funds from foreign investors who have a very wide field to choose from. The all-round clamour against such unwelcome interest
was, hence, disproportionate, and eminently avoidable.
Thankfully, better sense seems to have prevailed. Late on Thursday, the Central Board of Direct Taxes ( CBDT) said it was “committed to promotion of startups in India" and that after a high-level meeting it decided that valuations would be on the basis of a committee of “eminent experts". The CBDT added that “no coercive action/measures to recover the demands of completed assessment under Income Tax would be taken". That’s a welcome step. An estimated 400 startups in India receive angel funding every year and commerce and industry minister Suresh Prabhu was quick to heed the outcry from the startup ecosystem over tax notices and he had taken up the issue with the finance ministry. The department of industrial policy and promotion pointed out anti-money laundering provisions in the Income Tax Act exempt investments by alternate investment funds, but there is no similar exemption for individual investors. The government cannot be, therefore, faulted for insisting startups register with it. And over 14,000 startups have done so, not all of them seeking tax concessions.
The National Democratic Alliance government has reserved a special place in its economic agenda for startups. It is certainly not insensitive to their special needs and had provided tax concessions for investments, including those made by angel investors, apart from other income-tax benefits. However, the tax administration was demonstratively sensitive to Prime Minister Narendra Modi’s anti-corruption crusade and there would have been the occasional overreach. The latest episode in the angel tax saga could be one such. It is commendable that the government has reacted with remarkable alacrity to protests from the country’s newest set of entrepreneurs to what they have perceived as unwarranted intrusiveness by the tax authorities. It is no one case that startups should be spooked by the taxman—and young entrepreneurs can easily take fright—but the latter is well within its line of duty in trying to tease black money out of the system. Improved communication on the need for oversight may have averted what could easily be construed as coercive intrusion.