Startups cry foul over I-T dept notices on angel investor tax | Invest in India

Startups cry foul over I-T dept notices on angel investor tax

BENGALURU: Startups that have raised that angel investments continue to receive income tax (I-T) notices which they insist are based on unfair assessments, and which force them to spend an inordinate amount of time and resources responding to and appealing against.
On Tuesday, former Infosys board member Mohandas Pai, who has invested in a number of startups, tweeted to finance minister Arun Jaitley that startups are being harassed by the I-T department for raising capital. "Very bad scene and very many are angry and upset, may shift overseas," he said, and noted that the appeal process is broken, and takes 15 years. Some of Pai's startups have received notices. An entrepreneur who TOI spoke to but who did not want to be named said that he had received an order from the I-T department last week for an angel investment it raised in early 2015.


The controversial angel tax was introduced in 2012, but it is only over the past year or so that the Central Board of Direct Taxes (CBDT) has been monitoring it and questioning investors. Under the tax, any investment raised from domestic angel investors above the fair value of a venture as determined by the CBDT will be taxed as income in the hands of the startup. The applicable tax rate is 30 per cent.

Angel investment slips over 50 per cent due to taxation.

The CBDT thinks a lot of this is black money that is sought to be turned into white. Last year, the government came out with a notification that startups were eligible for an exemption on this tax. However, this came with several riders and there's a lot of confusion around it.

For startups, the money raised is often critical given the early stage it is in, and when much of it is treated as income, it ends up paying most of it in taxes. The tax is seen to be a big reason for the over 50 per cent decline in angel investments in the first half of 2017.


"Valuations are usually based on the discounted cash value, and not on the book value. But the tax department looks at only the book value. And if the startup raises money at the end of a financial year, then it doesn't even get to deduct any expenses," the entrepreneur that TOI spoke to said.

 


The person, who has appealed the order, says the I-T department has questioned the company's valuation certification. "This has created a lot of unnecessary expenses at my end. Hiring a CA to handle this just takes away Rs 1 lakh," the person said.

Pai told TOI the department has every right to question the legitimacy of the money but not the valuation. Ritesh Bawri, founder of analytics firm Quantta Analytics, said he knows a lot of earlystage startups that have faced the same issue. Startups can choose to exempt themselves from this rule by providing a CA certificate, but these steps can be taken only after they have been charged a penalty fee. "The I-T department tells them to go for an appeal and avoid paying the fee. But that will take up so much of time and resources for a young company. That is borderline harassment," he said. Bawri raised angel investment this year and is worried he may get an order from the department once he files his returns.

 


Pai said an appeal takes 15 years to be decided on and the startup will have to keep spending money on it till then. "Entrepreneurs are techies, they don't have much knowledge about this. They are scared of the government now," he said. This is one reason why Manik Mehta, cofounder of Bengaluru-based online booking software Omnify, chose to raise funds from US investors even though it operates out of India.