Startups and investors have lauded the government’s initiatives to exempt startups from the so-called ‘angel tax’, but some people in the community fear the dreaded tax may continue to haunt many of them because a few key issues remain unresolved.
The Central Board of Direct Taxes (CBDT) had on August 30 issued a consolidated notification giving a comprehensive summary of the mechanism under which startups would receive exemption from Section 56(2)(viib) of the Income Tax Act. But it did not provide a fix for some outstanding issues, industry insiders said.
“We have to hand it to the government for solving 99% of the problem, but the seeds for this issue to come back have already been sown,” said Siddarth Pai, founding partner at early stage venture capital fund 3one4 Capital. “There are still things that startups do in their ordinary course of business that can deny them exemption from angel tax.”
The issues stem from a circular by the Department for Promotion of Industry and Internal Trade (DPIIT) in February, which detailed the parameters under which startups can seek exemption from angel tax. To be eligible, a startup should not give loans or make advance payments, invest in shares or securities, or make capital contributions, it said.
This would make startups that have given salary advances or loans to employees, and those that have made advance payments for purchase of assets not eligible for the exemption from angel tax, experts said. It also closes the door on startups from engaging in M&A activity as such deals often include cash as well as stock options.
“When companies that have engaged in any of these activities file their annual financial reports, assessing officers will once again have the right to deny these startups of their exemption,” Pai said.
Others said they are hopeful that DPIIT would relook into its February circular and make amends. Some said they are in touch with the department to find a solution for the problem. “There’s certainly a concerted effort to provide ease of doing business for startups, and a large portion of the cases should be addressed by this,” said Rehan Yar Khan, managing partner at early stage VC fund Orios Venture Partners. “Since the intent is in the right place, I’m positive that solutions for the remaining issues should come through.”
He expects positives of the government initiatives to be seen in the medium term with startups thriving by getting on with their business. This would help startups create more value and set the stage for more money to be put into the startup ecosystem, Khan said.
Yet, some experts said resolution or partial resolution of the angel tax issue isn’t an assurance for more funds being ploughed into early stage firms. While investments in Indian startups are bucking the trend of slowdown, no boost in investments should be expected in the near future, they said.
Source : PTI