India has been a global leader in terms of creating successful entrepreneurship opportunities in the last few years. The investors’ community across the globe that includes High Net-worth Individuals, Venture Capitalist, Angel Investors and many others have always been more than bullish on the growth prospects of the fast-developing Indian startup ecosystem.
However, government initiatives such as Startup India, Stand-up India and Digital India have always given the right amount of push to the Indian Startup ecosystem. ‘Angel Tax’ has been the nightmare for the entire Indian startup community.
What is Angel Tax?
Angel Tax is used to basically describe the income tax payable on the capital raised by unlisted companies through off market transactions via the issue of shares. Angel Tax is levied on the capital raised by an unlisted company from an Indian Investor through the issue of shares, if the share price of issued shares is seen in any amount excess than the fair market value of the company. This excess amount is considered as income therefore, taxed accordingly.
Angel Tax was used to levy at a hefty rate of 30.90% on net investment in excess of the fair market value. The tax department used to go by the rule book and calculate market value based on the net assets of the company. However, according to Startup owners estimated growth prospects and future projections should also be considered as major factors in determining the fair market valuation of the startup. This difference of methodology made the startups to pay a hefty price at a whopping rate of 30%.
The Purpose Behind Angel Tax
While it is understandable that the Government tried to discourage misuse of startup funding by imposing tax in the hands of startup, this didn’t seem to be the right idea behind the purpose. This taxation used to limit investors from putting their money and trust on fledging and early stage startups, which ultimately restricted more people to come forward and start their own business.
Almost all the unlisted and early staged startups rely heavily on funding from Angel Investors to build the groundwork necessary to get further funding. Taxing this investment discouraged the angel investors, ultimately shifting the burden on fledgling startups.
Relief from Angel Tax
Keeping these issues in mind Finance Minister of India Mrs. Nirmala Sitharaman while addressing the country on August 23, announcing growth measures for Indian economy relieved the startups from Angel Tax. She announced that the start-ups registered with Department for Promotion of Industry and Internal Trade (DPIIT) will be eligible to avail this relaxation post the announcement.
Ahead of the Union Budget, Sitharaman had been urged to revoke the angel tax. However, the budget announced on July 5 only contained announcement regarding Income Tax scrutiny. Sitharaman had announced that the returns will not be subject to any kind of scrutiny in respect of valuation of share premiums, which was somewhat relieving to the community. However, the revoking of angel tax completely has been a bold step for the community to stand on its feet.
The startup community welcomed the move. Removal of Angel Tax will go long way to reassure trust and confidence in the startups and the investors. This step not only gives a boost to existing startups but will also encourage new entrepreneurs. With the removal of Angel Tax early stage ventures will be able to raise seed capital and not just interior industry but the economy as a whole will grow.