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A little more angelic now PDF Print E-mail
Thursday, 21 February 2019 00:00
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Over a year to fix the issue, but no relief for existing cases

 

While the government has done well to finally address the issue of taxing angel funding, the long delay—and the series of twists and turns in between—speaks volumes for how a reluctant tax department managed to put off a solution for well over a year. And this is despite the fact that start-ups are a personal passion of prime minister Narendra Modi who even got the government to set up a fund to help catalyse investments into these start-ups. Indeed, with the areas the start-ups are working in like fintech/health-tech/agri-tech/etc., and the possibility of providing radical solutions, these start-ups have already created a lot of value for investors. According to Inc42—a media platform dedicated to the start-up ecosystem—between them, India’s 39,000 start-ups have got a total funding of $38.5 billion since January 2014 and are, today, valued at around $130 billion.

So, when matters came to a head and surfaced in the media, and the government said there would be no harassment till a committee came up with a solution, the taxman continued to issue notices and, in one case, the start-up said the taxman had even attached its bank account and withdrawn money from it. And when those protesting against the tax on angel funding ratcheted up the protest, the taxman issued clarifications that were niggardly and didn’t really address the issue. So, for instance, when no tax was to be levied if the start-up had a capital of under `10 crore, this low cap limited the scope of angel funding. And since the exemption applied to angels who had an income of over `50 lakh and a net worth of over `2 crore, this effectively ruled out investments from friends and family that probably represent a fifth of all angel investment. By saying investment up to `25 crore in start-ups will now be exempt, the friends-and-family issue has been sorted out; start-ups can now have a capital base of up to `100 crore in place of the earlier `25 crore and any listed firm—with a turnover of at least `250 crore and a net worth of `100 crore—can also act as an angel investor without the money being taxed; funding by big local firms can be a big source of investment as it is in other countries.

To ensure the solution works, the government must now monitor tax demands to ensure the taxman doesn’t still try to catch angel investments under the ambit of Section 68 of the I-T Act; so, as long as the start-up furnishes the PAN numbers of investors and all payments are made by cheque, that has to be good enough. The taxman is under pressure to ensure that shell companies don’t masquerade as start-ups, so the temptation to have stricter norms in practice needs to be guarded against. Also, the stipulation that the start-up can’t invest in shares will ensure no start-ups can merge or take over another firm; this is unduly restrictive. If the taxman is worried about the use of shell companies to siphon off funds, he needs to catch them, not make life difficult for start-ups. Also, there is little point coming up with new rules if the 2,000-2,500 tax orders already passed are not scrapped based on the new rules.

 

 

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