Tax on angel investments haunts a majority of India’s startups, finds survey

Tax woes are not leaving Indian startups any time soon.

Around 73% of startups in a recent survey said they have received at least one angel tax notice. Almost 30% have received three or more such notices.

The survey, which included over 2,500 startups and entrepreneurs, was conducted by online community platform LocalCircles and Indian Venture Capital Association.

A startup becomes liable to pay angel tax when it receives an equity infusion in excess of its "fair valuation." Tax authorities treat the premium paid by investors as income, taxable at about 31%.

India's income tax department sent out a fresh clutch of angel tax notices in December 2018, which included penalties for late payment. In some cases, the sum that the startups must cough up as tax and late payment fee even exceeded the original funding amount.

Various startups and groups including IT industry trade body NASSCOM, the Indian Angel Network, iSPIRT Foundation, IVCA, and LocalCircles have written to the government, seeking either the abolition of angel tax or at least more relaxed criteria. Currently, only firms registered after 2011, are eligible to sidestep the tax.

Nearly half of the startups who participated in the survey were incorporated in 2011 or earlier. About 75% of those that received the tax notice said the funding amount in question was less than Rs 2 crore ($279,00).

Members of government, including prime minister Narendra Modi, have voiced support for the startups' demand. On January 17, the government made the exemption process less bureaucratic. Instead of an inter-ministerial group, applications will now go to the department for the promotion of industry and internal trade, which will forward them to the central board of direct taxes for approval. However, the improvement is still full of loopholes.

In his February 1 budget speech, interim finance minister Piyush Goyal lauded India's startup community for creating jobs. "With job seekers becoming job creators, India has become the world's second largest startup hub. We are proud of the hard work and innovative ideas of our youth," he said.

However, he avoided the topic of angel tax altogether, leaving expectant startups in limbo.