Angel Tax: Government Says Final Solution In 5 Days, No Relief On Existing Orders

A fresh notification which will be the final solution to the menace of angel tax can be expected within the next five days, Department for Promotion of Industry and Internal Trade Secretary Ramesh Abhishek has assured investors and start-up founders.

While the government has ruled out striking down the angel tax law, on the pretext that money laundering through the start-up medium has been kept under check due to the law, it has provided no relief to start-ups already dealing with tax orders. Founders, however, don't have to pay up the assessment amount, and can keep up their appeals against the order.

However, in the fresh notification, expected by the end of this week, several changes are likely to find their way to the January 17 notification, which was branded old wine in a new bottle by the start-up community and was given a thumbs down for the lack of offering any real solution.

In a round-table chaired by Mr Abhishek, a cross-section of start-up founders from across the country, angel investors and venture capital funds was invited to interact with members of the DPIIT and the Central Board of Direct Taxes (CBDT) to work out a final solution on the angel tax law, under which the Income Tax Department has sent several notices and orders to founders, demanding a 30.1 per cent tax on investments they raised in the previous years.

The meeting was attended by Rajesh Bhoot, Joint Secretary - tax policy and legislation at CBDT, and Anil Agarwal, Joint Secretary at the DPIIT and head of the Startup India initiative.

In the best case scenario, the DPIIT will work with the CBDT to grant exemption from the angel tax to all DPIIT-registered Level-I start-ups, in what has been the long-standing demand of the start-up and angel network to the government. A recent survey conducted by the Indian Private Equity and Venture Capital Association (IVCA) and LocalCircles revealed that 73 per cent of the start-ups which have raised capital have received one or more angel tax notices since their inception. The survey also found that in about a third of the cases, the fund-raising questioned was in the Rs 50 lakh-2 crore range.

What will the solution entail?

Start-ups have proposed the following changes to the January 19 notification of the CBDT:

• The ceiling on the start-up eligible for applying for exemption, in terms of the amount of the paid-up share capital and share premium of the start-up after the proposed issue of share, if any, be raised from Rs 10 crore to Rs 25 crore
• The minimum income criteria for an investor be lowered to Rs 25 lakh from the current Rs 50 lakh
• The minimum net worth criteria for an investor be lowered to Rs 1 crore, from the existing Rs 2 crore
• If the CBDT does not respond to a start-up's application for exemption from angel tax within the mandated 45-day period, the same may be considered as deemed approved

"Points from the ecosystem have been taken. A smaller group of members from the ecosystem will sit with the CBDT and DPIIT, and create a guideline in the next five days, which will be the final solution," said Sreejith Moolayil, co-founder and COO of True Elements, after the round-table.

"CBDT and DIPP have committed to coming up with a fresh notification to provide relief on angel tax, and some of us will be working with them during this period," said Sachin Taparia, founder and chairman of LocalCircles.

Mr Taparia is part of the smaller working committee and will be meeting the DPIIT today as well. "The objective is to devise a mechanism through which start-ups can differentiate from shell companies and get a blanket relief from angel tax," Mr Taparia added.