Stakeholders of the startup community in India have feared a severe backlash from the dreaded Angel Tax and other laws for the past few months. Sensing repercussions the government had promised to ensure that undue distress will not be caused, over section 56 and 68 of the Income Tax Act to authorise assessee officers to tax legal angel money invested in the startups.

But, the reality is that over 70% of the Indian startups, that have raised capital, have received one or more notices from the tax department.

It seems the government’s commitment to provide relief to the startups remains superficial.

In an unfortunate incident, the Central Board of Direct Taxes (CBDT) emptied the coffers of two very promising startups — TravelKhana and Babygogo — by deducting Rs 33 lakhs and Rs 72 lakhs respectively from their accounts on account of the Angel Tax.

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The reality is that over 70% of the Indian startups, that have raised capital, have received one or more notices from the tax department.

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The Angel Tax is levied on startups which have received an equity infusion in excess of the fair valuation with the premium being paid by the investors as their income. This unique clause of taxation exists only in India and taxes capital receipts and investments as income.

It has been observed that the assessing officers have taken upon themselves to value the company, like an investor would, which is in sharp contrast to what the law offers as choice of valuation to the assessee.

The same has been done in this case by the CBDT, which, the startups claim, had not even given adequate time to respond to tax notices and queries. The CBDT in their statement had said that no certificate from the Department of Industrial Policy and Promotion has been furnished that provide evidence to the company’s claim of being a startup.

The CBDT, in its last statement, clarified that the money withdrawn from the accounts is owing to unexplained cash credits.

Hence, the company’s case was not covered under the 24 December notification which said that no coercive action would be taken against startups that have received notices from the tax department. However, the assessee officers chose to ignore the notification and have withdrawn money from the account in any case.

This action has caused much agony to the startup community in India with many entrepreneurs and investors starting to argue that the companies need to be incorporated in places like Singapore, raising questions with regard to the ease of doing business in India.

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Despite these crises, there is little doubt that the government has done commendable work to bring the focus back on the entrepreneurial milieu.

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In a recent interview, Prime Minister Narendra Modi had sought to assuage the fears of the community, when he spoke about the need to be sensitive to the new economy and looking at it through newer lens. Further, acting Finance Minister Piyush Goel said in Parliament that the government will not go after startups raising funds through legitimate means. However, it seems the commitment to look at the new economy through a newer lens has not really delivered on the ground. Even the interim budget did not offer the startup community any respite from the issue.

Despite these crises, there is little doubt that the government has done commendable work to bring the focus back on the entrepreneurial milieu in the country via the Startup India scheme, Atal Innovation Mission and other similar initiatives.

But, there still exists a simmering discontent amongst the startups. The government needs to focus on restoring the confidence of the startup community. For this, the government should do the following:

• Remove the Inter-Ministerial Board scrutiny process completely.
• Do away with the certification from DPIIT that underscores innovation of the startups.
• Speedier issuance of notifications from the DPIIT and the CBDT to provide clarifications with regard to sections 56 and 68.
• CBDT advising assessing officers to give some consideration to the tax exemption certificate for startups.
• Scrap budgetary allocations to venture funding and exempt startups from Angel Tax.
• Give a clean tax holiday to startups for five years to all entities under Section 10.

These steps would help the startups in a big way and help make the government startup schemes very effective.

• Indian Economy
• India
• Angel Tax
• Atal Innovation Mission
• Central Board of Direct Taxes
• Startup India

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