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Draconian Angel Tax Is Finally Terminated; But Will It Be Useful For Indian Entrepreneurs?

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In 2012, Indian Govt. introduced a draconian and regressive tax for startups called ‘Angel Tax’. This was included under Sec 56 (2) of the I-T Act, wherein any capital raised by any unlisted Indian company against share issuance in excess of market value was eligible for tax under a special category called ‘income from other sources’.

Due to this tax regime, startups were paying 33% tax on their funding and this was one of the primary reasons for mass exodus of Indian startups to startup friendly nations like Singapore.

Government has decided to end this regressive tax for investors and startups with an aim to boost entrepreneurship and to create more jobs. Indian startup community had been lobbying hard to remove this draconian tax and finally their demands have been met.

Last week, The Central Board of Direct Taxes issued a notification, declaring this change in the Section 56(2)(viib) of I-T Act. Thus, eligible resident angel investors, domestic family investors and domestic funding companies would not have to pay such tax for their angel investments into a startup.

But Will It Really Benefit Daring Entrepreneurs?

The industry lobby is no doubt elated that such unnecessary anti-startup tax has been removed. But they are also cautious about the finer details of this change in tax structure, as they believe that not every startup, especially those which are into tech niche, would be benefited from this exemption.

In fact, as per some industry veterans, only 2-5% of existing startups would get the relief, as the criteria for such exemption is rather difficult.

Which Startups Are ‘Eligible’ For Exemption From Angel Tax

As per the notification issued by CBDT (dated June 14th), only those startups which are covered under the definition of a startup as prescribed and directed by Department of Industry Policy and Promotion (DIPP) would be eligible for the exemption from angel tax.

As per DIPP, a startup is an entity which is:

  1. Less than 5 year old
  2. Turnover less than Rs 5 crore
  3. Working towards “innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property”

Startups which want to get ‘certified’ by DIPP needs to apply for a certificate from an inter-ministerial board of certifications and then only angel tax exemption can be applied.

Unfortunately, only seventy to eighty startups have actually received this certification till date as innovation and development is a subjective matter and not every startup is able to convince the government about their future strategies.

Besides, retrospective investments are not covered under this new tax reform which means that investment made in the last four years would be continued to be taxed aggressively.

Saurabh Srivastava, cofounder of Indian Angel Network, said, “For all angel investments that were made in the last few years ever since the Section 56 came into being, the startups and angel investors are today being harassed by income-tax authorities which have opened up their investment records. This is not a good scenario and is upsetting angels.”

None the less, India has now ceased to become the only nation in the world to tax investments in startups, which is indeed a big and bold step towards development of business and entrepreneurship. However, we need more debate and introspection to make the Indian startup story a true success.

Some of the recent startup reforms announced by Indian government:

Capital Gains Tax Abolished on Startup Equity Held For 2+ Years #StartupReforms

Pro-Startup Wave in India: More Reforms in Companies Act 2013; RBI To Allow Smooth Exit For Overseas Investors

Government Turns Angel – Increases Startup Fund By 5 Times!

Big Boost for Indian Startups – Draconian Tax On Seed Funding Will Be Abolished

Govt Plans Tax Reduction For Startups, VCs; Industry Excited With The Possibilities

Entrepreneurial Revolution Is Happening In India.. Now You can Register a Company In a 24 hours!

Sources: 1, 2, 3

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