Angel Tax Row: DPIIT And CBDT To Collaborate To Form Guidelines In Next 5-6 Days

After a disappointing interim budget 2019 which had no solution to the angel tax woes of the Indian startup ecosystem, the roundtable organised by the Department for Promotion of Industry and Internal Trade (DPIIT) held in Delhi has concluded to form the guidelines on the subject in the next five days as the final solution.

The representatives from leading startup-related associations, India Private Equity and Venture Capital Association (IVCA), iSPIRT, NASSCOM, TiE, Indian Angel Network, and community media platform LocalCircles, participated in the roundtable discussion.

The discussions saw all parties reaching a consensus on core issues such as current restriction imposed on angel investors from minimum income in the previous year to INR 25 Lakhs ($35.15K) instead of INR 50 Lakhs ($70.3K) as mentioned in the recent notification.  Along the same lines, keeping the minimum net worth of angel investors to INR 1 Cr ($140.6K) from the existing INR 2 Cr ($281.2K) is also recommended.

Talking to Inc42, Nakul Saxena, director of public policy at iSPIRT said, “The meeting was productive as the members heard reasons of the government and shared their pain points as well. DPIIT secretary Ramesh Abhishek took up the onus to ensure that the working group takes the decision within 5-6 working days.”

The committee comprising a few startups, representatives of CBDT, DPIIT, Local Circles and iSPIRT representatives will work together to help get startups exempted upto INR 25 Cr capital, instead of INR 10 Cr.

The discussions are also being held on changing the definition of startups to companies which have been registered for 10 years or less compared to 7 years specified in the rules before.

Speaking to Inc42, Sachin Taparia, chairman, LocalCircles said, “The good thing is they are willing to work together and at present, these are the two solutions that seem to be emerging. The committee is willing to work for solutions that will help them exempt startups and not money laundering companies.”

Taparia emphasised that they are working on finalising the solution which can highlight the DPIIT-recognised startups based on the documents they will share with the organisation. With this, the rules of angel tax will continue without compromising the startups.

End Of Angel Tax Woes?

Earlier today (February 4), a survey by IVCA and Local Circles showed that 45% of the respondents have received more than one angel tax notice (under Section 56(2)(viib) or Section 6) from the income tax department to date. Another 28% said they have received 3 or more such notices while 27% said they did not receive any notice.

The majority, i.e. 73%, received notices on raising INR 50 Lakh-INR 2 Cr, while only 6% received notices for raising less than INR 50 Lakh.

In 2018, to express their discontent, startup founders and investors took to Twitter and protested the government’s continued apathy on the issue despite its pro-startup stand. Later, a group of 70 startups and iSPIRT foundation reached out to the Prime Minister Narendra Modi saying that startups require significant capital early on and that raising equity funding via angel investors is the only option for them, which can only be raised at a premium for various reasons.

A relief in the angel tax came in January 2019 when new rules were applied to DPIIT-recognised startups as part of which the earlier rules of inter-ministerial board certification for approval and the report of a merchant banker specifying the fair market value of shares had been removed.