Angel Tax Is Dead But Pending Cases Must Be Quashed: Mohandas Pai

While the abolition of angel tax has come as a big relief for the world’s third-largest startup ecosystem, Mohandas Pai, the former CFO of Infosys and partner at Aarin Capital, now wants all the pending cases under the annulled tax regime quashed.

Speaking with Inc42, after the budget announcement, Pai said, “It is a big relief for the startups. The government should have done it earlier instead of harassing people. The government must now withdraw all cases pending under angel tax in the last five years and state clearly that no angel tax will be levied on any pending assessments.”

“All the people stuck in the angel tax web should be relieved,” Pai reiterated.

We must note that during her budget speech on July 23 (Tuesday), finance minister Nirmala Sitharaman announced the abolishment of the angel tax, a much-criticised taxation regime among Indian startups and investors.

Following the announcement, social media platforms were flooded with reactions from investors, the VC ecosystem, founders, and tax lawyers – all breathing a sigh of relief.

“The life of an entrepreneur is defined by time and a constant battle against insuperable odds. Angel Tax best exemplified this statement as it was an albatross across the neck of all Indian entrepreneurs for 12 years,” as per Siddarth Pai, the founding partner at 3one4 Capital.

However, the pending cases continue to be a concern, he also stated.

What About Pending Cases Under Angel Tax?

In October last year, Inc42 reported that 10,809 DPIIT-recognised startups applied for the angel tax exemption between February 19, 2019, and September 26, 2023. Of these startups, only 8,066 were granted exemption.

In contrast, only 944 startups had applied for angel tax exemption as of June 21, 2019, out of which the CBDT exempted 702 startups under this provision.

Hence, it goes without saying that there are hoards of cases still pending under angel tax.

As 3one4 Capital’s Siddarth Pai said, “The section will no longer be operational from April 1, 2024 (once the Finance Bill gets passed). This means that all startups which have raised capital at a premium [since the starting of this fiscal] shall not be subject to this Angel tax from April 1, 2024 onwards (April 1, 2025 mentioned in the Finance Bill is for the relevant assessment year, not the year it goes live).”

However, he added that the ones that raised capital in previous years may still receive a notice. 

“The FM must announce that startups in the past will not face Angel Tax notices and those which have received notices should see them withdrawn,” Pai said.

Echoing his sentiment, Sandiip Bhammer, founder and co-managing partner at Green Frontier Capital told Inc42 that the issue of pending cases under angel tax is a “looming concern” for startups and investors. 

“The government should take steps to establish clear guidelines and transparency, establish a fast-track resolution mechanism and engage with stakeholders for practical and implementable solutions,” Bhammer added.

Can The Government Lift Pending Legal Cases?

“While the government cannot drop the earlier cases as the law has existed so far, one remedial path the government can take is to give instructions or issue administrative circular to be less stringent on the pending cases or respect their valuation reports,” a legal expert told Inc42, requesting anonymity.

Meanwhile, Rajarshi Dasgupta, executive director, tax, at AQUILAW, also said that the pending cases under the angel tax will continue as it is, unless otherwise falling under amnesty.

On the other hand, Anirudh A. Damani, founding partner at Artha Venture Fund, suggested that one approach could be introducing a scheme similar to the Vivad Se Vishwas initiative to resolve tax disputes amicably. 

“Such a scheme could help withdraw these cases, provided the investments are verified as genuine,” he said, adding that the valuation paid during these investments mustn’t be subject to scrutiny by tax assessors, as the focus should be on supporting and fostering the startup ecosystem rather than penalising it,” Damani added.

What Is The Discussion All About?

For a quick recap, initially, the idea behind introducing angel tax was to keep shell companies at bay and prevent laundering of black money.

Though there were certain amendments introduced over the period as the government faced pressure from the startup ecosystem, it continued to remain a hurdle for investors and companies following fair business practices, as noted by industry leaders.

Though a major concern remains around the pending legal cases under angel tax, a major hurdle is gone nonetheless with its abolition. 

As Bhammer noted: earlier, the tax was imposed on startups raising capital at a premium in excess of their fair market values as the excess value was treated as income. Since most startups did not earn a profit for some time after the commencement of their businesses, it became difficult to justify the premium as the fair market values were always low. 

As a result, there were frequent disputes between the startups and tax authorities in connection with the fair market value of shares, which led to costly and lengthy litigation and put off international investors from investing in India’s startup companies, said Bhammer.

With angel tax now abolished, startups will be able to raise funds more easily without the fear of any tax liabilities. 

“International funds can now invest in companies based on market-driven competitive valuations without the risk of any tax scrutiny and potential disputes with the Indian tax authorities,” he added.

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