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Nasscom, venture capitalists’ body call of abolition of angel tax

Ahead of the likely ‘vote-on-account’, the chorus for abolition of ‘angel tax’ has got louder with the Nasscom, IVCA, Indian Angel Network and TIE Global dashing out a joint letter to Finance Minister Arun Jaitley and Commerce Minister Suresh Prabhu in this regard.

Making a case for abolition of ‘angel tax’, the industry bodies said the Prime Minister’s push for ‘Start-up India’ has run into “severe implementation problems” due to the said tax provision (Section 56 of the Income Tax Act).

The Indian Private Equity and Venture Capital Association (IVCA) is the apex industry body representing private equity and venture capital players in the country.

The joint letter said nowhere in the world does such a provision — which penalises angel investors and the start-ups simply because premium is paid or discount is given on the sale or purchase of shares — exists.

The ‘angel tax’ is based on the mere suspicion that angel investors are investing their undisclosed income, according to the industry bodies. There is no empirical evidence to show that there exists any systemic menace in this regard, said the letter.

“If there is any investor who cannot explain the source of investment, we suggest, by all means go after that investor. But every investor paying premium or getting discount should not be presumed to be deemed criminal and penalised,” the letter said.

It was also submitted that the taxman could address his concerns around the genuineness of the transaction including legitimate source of funds under Section 68 (of the income tax law) related to unexplained cash credits

No coercive measures

No sooner than a spate of tax demands hit several start-ups, the matter reached the corridors of power in the Capital.

This prompted the CBDT to issue directions to its field formations on December 24 that no coercive measure be taken to recover outstanding demand in case of start-ups if additions have been made under Section 56(2)(viib) (angel tax provision).

This will have to be the case till further instructions are issued by the CBDT in this regard. The problem is that the CBDT instruction is not widely known across the country, putting many start-ups under the taxman’s stranglehold.

Shailesh Kumar, Director, NANGIA Advisors, felt that specific amendment to the income tax law through Budget or otherwise is not necessary to provide relief to start-ups. The relief may be granted even by way of a CBDT notification providing appropriate guidelines or safeguards to protect the investors, he said.

Start-ups’ views

Deepak Sahni, founder and CEO of startup, Healthians, said intervention by Prime Minister Narendra Modi can save the situation. “As of now, there is absolutely no clarity on the issue. The Tax Department wants to know how valuations can be high when the start-ups are suffering losses,” he said. Healthians is a health diagnosis home service start-up.

He said the tax officials do not make a distinction between a company and a start-up. While some Assessing Officers accept the valuations, others do not. “If the Government takes up the issue in February before Parliament and brings clarity on the issue, then the start-ups will be able to breathe easy. Otherwise, once the country gets into the election mode, a lot of start-ups will face huge problems. As a collateral damage there are quite a few start-ups that have deferred plans for their funding.

Aprameya Radhakrishna, who was one of the co-founders of taxiforsure, which was later acquired by Ola, said as an investor he has been asked to file documents with the tax authorities. He said he is not aware of any new Finance Ministry circular on the angel tax. “Here investment is seen as income and goes against the very nature of funding start-ups,” he said.

Shezaan Bhojani, co-founder and CEO of Design Cafe, said on the one hand the government wants to encourage start-ups and showcase India as a leader to the world, but on the other, the Income Tax department issues IT notices to 100s or thousands of start-ups with tax demands on investment or capital raised from genuine investors.

Source: The Hindu