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Angel tax: The fear of money laundering must not stunt investments in early-stage startups

4 8 21
20.12.2018

As the year draws to a close, many startups are wondering if they’re going to get coal in their Christmas stockings. With the Income-Tax (I-T) Department once again issuing notices, the dreaded angel tax is back to haunt startups.

While Union Minister for Commerce Suresh Prabhu promised to take up the matter of I-T notices on angel tax with the Ministry of Finance, the fact is that until the law is amended, startups remain at the mercy of I-T officials and are dependent on a friendly ear in the government for (temporary) relief. On their part, the I-T Dept and the FinMin have a duty to prevent money laundering by way of 'investments' in startups, but the law, as it currently stands, seems to go against the spirit of the Startup India initiative.

In 2017, startups had raised concerns on taxation of angel funds under Section 56 of the Income Tax Act. Earlier this year, the Ministry of Finance sent out a circular asking tax officials to refrain from coercive action in cases that fall under Section 56(2) of the Income Tax Act, 1961.

But that doesn’t seem to have happened. Some say that the issue price of shares by startups might have been inflated in the past based on optimistic projections, based on the actual performance over the last few years, I-T officials may have deemed these angel investments to be higher than the fair market value and sought to tax the difference.

Sources in the I-T Department say that whichever company is issued such a notice is given a chance to first establish that they are, indeed, a startup, and the acceptable definition of a startup is recognition by the DIPP. The current round of notices, they say, have gone out to companies which were already under scrutiny in earlier years.

[Also read: DIPP takes up angel tax notices with revenue department]

Be that as it may, entrepreneurs and investors alike feel that the government needs to find a way to balance the need to encourage startups with the need to curb money laundering via angel investments. Efforts at detecting money laundering cannot be allowed to stunt innovation in India.

The Department of Industrial Policy and Promotion (DIPP), which oversees the Startup India programme, is yet to respond to an email sent by YourStory on this matter.

As Avnish Bajaj, Founder and Managing Partner, Matrix Partners India, puts it,

“This is one of the most digitally savvy and startup-friendly governments. Yet all the........

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