Startups cry foul over I-T dept notices on angel investor tax

BENGALURU: Startups that have raised that angel investments continue to receive income tax (I-T) notices which they insist are based on unfair assessments, and which force them to spend an inordinate amount of time and resources responding to and appealing against.
On Tuesday, former Infosys board member Mohandas Pai, who has invested in a number of startups, tweeted to finance minister Arun Jaitley that startups are being harassed by the I-T department for raising capital. “Very bad scene and very many are angry and upset, may shift overseas,” he said, and noted that the appeal process is broken, and takes 15 years. Some of Pai’s startups have received notices. An entrepreneur who TOI spoke to but who did not want to be named said that he had received an order from the I-T department last week for an angel investment it raised in early 2015.
The controversial angel tax was introduced in 2012, but it is only over the past year or so that the Central Board of Direct Taxes (CBDT) has been monitoring it and questioning investors. Under the tax, any investment raised from domestic angel investors above the fair value of a venture as determined by the CBDT will be taxed as income in the hands of the startup. The applicable tax rate is 30 per cent.
Angel investment slips over 50 per cent due to taxation.
The CBDT thinks a lot of this is black money that is sought to be turned into white. Last year, the government came out with a notification that startups were eligible for an exemption on this tax. However, this came with several riders and there’s a lot of confusion around it.
For startups, the money raised is often critical given the early stage it is in, and when much of it is treated as income, it ends up paying most of it in taxes. The tax is seen to be a big reason for the over 50 per cent decline in angel investments in the first half of 2017.

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