The Bane of Angel Tax: A Brief Timeline

Introducing the Finance Bill in the Lok Sabha on March 16, 2012, the then finance minister Pranab Mukherjee had stated, “I had outlined a five-pronged strategy to tackle the malaise of generation and circulation of black money and its illegitimate transfer outside India. The government has taken a number of proactive steps to implement this strategy.”

Insertion of Section 56(2)(viib) in the Income Tax Act 1961 (later known as angel tax) was one of the five-pronged strategies to discourage shell companies and black money circulation.

There is no report relating to how much this clause helped curb black money circulation. However, there are reports by Inc42, iSPIRT, NASSCOM and others which clearly state that angel tax has sabotaged the Indian startup ecosystem significantly.

According to Inc42’s ‘The State of The Indian Startup Ecosystem Report’, and iSPIRT Foundation’s report, Seed-stage funding is down by 21% from $191 Mn (January-September 2017) to $151 Mn (January-September, 2018) while the number of early-stage rounds has come down by 28.5% in 2018. The number of unique domestic investors is down by 48% since 2015.

In an annual startup cum SME survey done by community-based social media platform LocalCircles, 38% startups said they received one or more tax notices in 2018 while 97% were of the opinion that income tax officers must be educated on startup valuations.

24% of startups/SMEs stated that they were, in fact, looking at winding up business in 2019.

The latest DIPP notification (dated January 16, 2019) pertaining angel tax has failed to meet the demands of startups and investors. The startups have demanded to raise the share premium limit from the existing INR 10 Cr to INR 25 Cr. The restriction over the minimum income criteria for angel investors should be removed as long as the income is tax paid and a PAN can be sought.

The angel tax exemption should be made available to all the Department of Industrial Policy and Promotion (DIPP)-recognised startups and should not be restricted to a few. For instance, startups for which assessment orders have already been passed by assessing officers (AO) for the relevant financial year are not applicable to apply for the angel tax exemption according to the existing notification.

The Centre’s Startup India programme is under serious threat; the situation is grave, and it will become worse if immediate structural policy measures are not taken to address the angel tax issue, startups recently wrote in a joint letter addressed directly to Prime Minister Narendra Modi.

Let’s take a look at the growing wings of angel taxation and its clipping by the DIPP in recent months —angel tax timeline!