Angel tax, or tax on capital raised by unlisted companies by issuing shares in excess of their fair market value, is seen as a contentious issue for startups even 18 months after the government exempted innovative firms from this tax.
In June 2016, the Central Board of Direct Taxes (CBDT) said capital raised by startups from domestic angel investors will not be taxed as income even if the investment was more than the fair market value of the shares. Earlier, such investments faced a 30% levy in the form of income from other sources.
It, however, came with the rider that the exemption will be available only to startups that meet conditions laid down by the Department of Industrial Policy and Promotion (DIPP), which now makes it mandatory for them to be certified as “startups” to claim an exemption.
So far, seven companies have been recommended by the department for tax benefits under the startup policy, while there are at least 150 that are claiming the benefits of the policy.
Nasscom has argued that the confusion over the tax regime, including notices to companies that have seen their valuations plummet when they went for a subsequent round of funding, has resulted in a fall in investment by angel investors in recent months.
The repeated complaints have prompted DIPP to take up the issue with Sebi, which is reviewing some of the rules, sources told TOI. In addition, the issue of tax rules has also been taken up with the finance ministry, amid indications that the concerns may be addressed in the Budget at a time when the government is keen to revive investments in the economy and spur job creation.
The industry has argued that valuing startups based on their assets alone, given intangibles such as goodwill, is not easy. Nor is it easy to arrive at a fair value for them, based on discounted cash flows.
“Imposing angel tax on startups has a direct impact on them as it taxes investment they have received from domestic investors. Startups have no revenues or profits and their valuation is based on the potential and promise of the idea and is usually a matter of negotiation between the founders and the angel investors,” said an industry source.