Angel investors hail Indian government's decision to abolish angel tax

But some startups see no relief in view of the stringent conditions to avail tax benefits.

Six months after promising more for the startup ecosystem, the Indian government has decided to do away with the "Angel Investment Tax" on investors funding money for startups.

In its notification, the Central Board of Direct Taxes (CBDT) in the Indian finance ministry said that Section 56(2) of the Income Tax (IT) Act has been amended, which has been one of the long-pending demands from the investors' community.

Unil now, all unlisted companies which raised funds in the form of equity were taxed as "income from other sources" under Section 56(2) of the IT Act. As such, these companies were paying more than 30 percent as corporate tax.

However, many startups may not be able to avail the concessions due to strict norms laid down by the government.

What has disappointed the startups was the terms and conditions prescribed by the Department of Industrial Policy and Promotion (DIPP) to avail such benefits. The eligibility criteria said that the companies should not be more than five years old and the annual turnover of each of them should not be more than 25 crore rupees.

Most importantly, these firms should work towards innovation, development, deployment or commercialisation of new products, processes, or services driven by technology or intellectual property.

Once these conditions are met, the startups should approach an inter-ministerial panel, comprising officials from various departments, which would issue eligibility certificates to the companies.

Speaking to ZDNet, co-founder of Venture Catalysts Dr Apoorv Ranjan Sharma felt that the government ought to focus on making the eligibility process more swift and rapid thereby ensuring that startups benefit from the new legislation.

Besides conditions and categorisations, the government is creating many barriers at entry level for the startups to avail such tax benefits. "Startups are meant to be innovative and if they fail to be disruptive, they will die early in this competitive space. Therefore every startup should be given an opportunity to be a part of Startup India initiative launched by the government early this year," Dr Sharma said.

Describing the move to do away with the much-awaited angel investment tax as a path-breaking move which would pave the way for future investments, he said that it will invariably bring huge relief to the domestic family offices or domestic funds and resident angel investors as it removes the tax ambiguity around investing in early stage startups.

He said that the notification has been a long-standing demand of the industry and would bring domestic investors, family offices, and funds on par with the exemption given to Venture Capital Firms. Henceforth, investments into startups by domestic investors would not be questioned on the basis of fair value and the startups would be entitled to receive consideration for shares in excess of the fair market value of the shares. It will certainly increase investment flow in startups, and will help pumping more capital into startups to strengthen their Startup India plan.

"The existing rules were acting as a deterrent for many investors and the startups too hoped that the government would abolish angel tax since they were also paying whenever they raise funds. Due to this, several startups shifted their offices to other countries such as Singapore and the UK where taxes are milder," Dr Sharma added.

The investors, however, said that the government's decision will boost investment flow to startups from angel investors.

"This is a very welcome step by the government as it addresses the angst due to Sec 56 of the infamous angel tax to a great extent. This will surely bring more money into startups and also recognises both the need and importance of angel investment," said Padmaja Ruparel, president of Indian Angel Network.

She also said that the eligibility criteria set by the government will help breed innovation and build high-growth companies creating jobs. These benefits will allow more entrepreneurs to startups, create more innovation, and build intellectual property.

"With the startups facing severe cash flow crunch, these benefits will allow them to plough all the available cash into building the venture. Again, it's another welcome step by the government," Ruparel added.