iSPIRT, LocalCircles Submit Angel Tax Recommendations To DIPP

As concerns over Angel Tax continue to haunt startups, policy think tank, iSPIRT Foundation and online citizen engagement platform have listed out a set of recommendations to the Department of Industrial Policy and Promotion (DIPP) to bring clarity to the situation.

“Angel tax issue is a clear and present danger for startups and this has to be resolved by removing the startups from the purview of the Sections 56(2)(viib) and Section 68,” Nakul Saxena, director of public policy at iSPIRT, in a written statement told Inc42.

Saxena who has worked closely with the central government and many state governments on their startup policies said that the measures implemented to solve the angel tax issue till now are “heartening” but it is still a partial solution to a larger problem.

“The CBDT needs to solve for the basic reason behind the cause of Angel Tax Section 56(2)(viib) to be able to give a complete long-term solution to Indian Startups,” Saxena added.

In their letter issued today (January 30), iSPIRT and LocalCircles have listed the following recommendations to DIPP:

• Startups registered with DIPP to be removed from the purview of Section 56(2)(viib) and Section 68
• Section 56(2)(viib) should not apply to any investment below INR 10 Cr received by a startup per year or increase the share premium limit to INR 25 Cr, from Indian investors provided that the startup has the PAN of the investors
• Funds received by startups from entities with a minimum income of INR 20 lakh or a net worth of at least INR 1 Cr should be exempt from section 56(2)(viib) and section 68 as a class of people notified by the central government
• Any startup who has received an assessment order should be able to seek recourse under this circular during their appeal
• The registrations by entities to invest in startups should be done once a year
• Entities cover investments by individuals, corporates and trusts not exempt under Section 56(2)(viib)

While Section 56(2)(viib) deals with the valuations and whether the funding is an income or investment. On the other hand, Section 68 of the Income Tax Act deals with unexplained credit.

Meanwhile, the Indian Private Equity and Venture Capital Association (IVCA) is conducting a survey to find out the total number of startups impacted by the Angel tax. According to IVCA, there is a “lack of clarity” in the number of startups who have been served tax notices in the past year. The association said that it would be working closely with LocalCircles to carry-out the survey.

The association hopes to share the data with the regulators and policymakers in the upcoming meeting with the DIPP scheduled on February 4.  The association said to post all the questions by today (January 30) and expects to present a scorecard in a matter of few days.

IVCA, iSPIRT, LocalCircles along with associations in the startup ecosystem such as NASSCOM, TiE, Indian Angel Network (IAN) have also written multiple letters to the DIPP, raising concern over the most-debated Angel Tax.

Update 1 (30 January, 12:44 pm IST) Post publishing this news, we got following response from IVCA:

“We realised that nobody has a clue about the exact number of angel tax notices served to the startups. Once we have consolidated data, we will be able to figure out the quantum along with the magnitude of the problem faced by the startups. We believe that by presenting this number, everyone can present a strong case pertaining to the exemption of angel tax.”

Update 2 (30 January, 1:55 pm IST) Post publishing this news, we got following response from LocalCircles founder Sachin Taparia:

“At this junction, getting rid of Section 56(2)(viib) and Section 68 for DIPP registered startups is the best way forward. DIPP already has API-integration capability which can be deployed to identify these startups in CBDT systems, so that, any time when a notice is generated by the Income Tax systems under these sections, they are auto nullified.”

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