Angel tax a burden on Indian startups

When the Narendra Modi government came to power, the buzz among the Indian entrepreneurial classes, and especially those in the startup sector, was that the new government would do more to promote entrepreneurship in the country.

Many of the laws in India pertaining to entrepreneurship predate the advent of the Internet and some startups have been forced to register in more business-friendly countries such as Singapore and the US, even while their entire staff operates from India. After its election in 2014, the Modi government’s seemingly fresh consideration of startups kindled hopes that things could get easier.

However, in the dying days of Modi’s current term in office, the startup industry is now livid about the angel tax and a crackdown that has been carried out over the past few weeks targeting alleged violators.

The angel tax is triggered when any startup raises equity funding in excess of its “fair valuation.” The premium is treated as income, attracting a tax of more than 30%. The new tax was introduced in 2012 by then finance minister Pranab Mukherjee to thwart the booming money-laundering industry. It has since become known as the angel tax as it largely affects angel investments in startups.

On Monday, current Finance Minister Piyush Goyal tried to douse their anger by issuing assurances that the government will not target startups raising funds through legitimate means. However, his promises had little effect.

A number of start-up companies have complained that they have received tax demands on angel funding they received years ago, and this has created ire in the industry. Being very tech savvy, they are airing their grievances on social media platforms such as Twitter, making hashtags such as #ShutdownIndia, #TaxTerrorism, and #ShiftOutIndia go viral.

Numerous stories of high-handedness by the tax authorities are doing the rounds on social media, with one of the widely shared ones being that of startup TravelKhana, which delivers food to train passengers. The Income Tax Department reportedly withdrew 330,000 rupees (around US$46,000) from TravelKhana’s bank accounts.

However, the Central Board of Direct Taxation later said the money recovered from TravelKhana was not taken on account of angel tax but due to unexplained cash credits. The company refuted the claim and countered that all its investments came through bank transfers or the equivalent, with none of them in cash. Other companies that have faced similar action from taxmen are struggling to stay afloat.

After the outcry among startups and a widespread buzz on social media, the government has now entered damage-control mode, with the Department for Promotion of Industry and Internal Trade reportedly working on a solution. The government is also likely to raise the exemption limit on paid-up share capital from 100 million rupees to 250 million rupees.

India is home to more than 7,000 startups and in 2018, tech startups raised a total of $4.2 billion, more than twice the amount raised in the previous year.