Indian government just added a lot more red tape for startups while trying to fix the devilish ‘angel tax’

• The government has announced in what it believes are easier processes for startups to claim exemption from Angel Tax.
  
• Startups incorporated before April 2016 can also apply for exemption.
  
• However, startups need to be recognised by DIPP for the same.

Indian startups have long been fighting the demon that came into their lives with the ‘angel tax,’ which requires them to pay up for money they received from early investors.

Now, the government has introduced changes to tax laws under the Section 56(2) (vii b) of the Income Tax Act that will exempt ‘genuine’ investors in recognised startups – but not without another red tape. They have to be registered with the government’s Department of Industrial Policy and Promotion (DIPP) in order to get the exemption.

The angel tax, which was introduced in 2012, mandated that angel investments should be treated as “income from other sources” if the startup issues shares at a price that exceeds the fair market value of the shares.

The Indian government believes it is now providing a simpler mechanism to claim exemption from the tax. While earlier, exemption from this tax was available only for startups incorporated after 2016 under the government’s ‘Startup India program’ – a much-touted initiative of the Modi government to boost entrepreneurship.

“All previous and future investments are covered, startups incorporated before April 2016 also covered,” DIPP secretary Ramesh Abhishek told Economic Times.

Since the launch of the Startup India program, 15,113 companies have been recognised under DIPP; India is home to a total of over 40,000 startups until June 2018 according to a YourStory report.

With the new rule in place, DIPP-recognised startups applying for the exemption to the Central Board of Direct Taxation will be able to get an approval in 45 days.

All in all, the rule becomes another added layer of bureaucratic hoops that startups now have to jump through, even though culturally speaking, a startup’s way of functioning is very different than that of a typical ‘registered company’.

Experts believe that investments in a startup by an individual is a commercial decision that needs to be treated like one. “The government’s intent is to check if anyone is misusing the methodology for money laundering. If the source of the money is not tainted then why should there be an angel tax,” said Ved Jain, a tax expert and past president of The Institute of Chartered Accountants of India.

The question that most experts are weighing in on is – why do we really need an angel tax? By implementation of the rule to register under DIPP, the government gets a say on how and when you startup – and that might not exactly be the ‘ease’ of doing business that the government is promoting.

“Why are we moving with a presumption that whichever company is receiving the share capital with a difference in the fair market value, there is something wrong with the deal. There has to be a difference between a commercial and government decision. However if there is an allegation that it has been misused, only then additional rules should be implemented,” said Jain.

See Also:
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