Startups can’t overcome Angel Tax fear despite Nirmala Sitharaman’s assurance

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The threat of ‘angel tax’ is yet to recede despite assurances from finance ministerNirmala Sitharaman that startups wouldn’t face out-of-the-ordinary tax scrutiny.

Angel tax is a term used to refer to the income tax payable on capital raised by unlisted companies via issue of shares, where the sale price is seen in excess of the fair market value of the stock sold.

After several requests from startups over how this tax was impacting their fund raising plans, the Department of Industrial Promotion (DIPP) in February this year announced new rules that said companies whose share premium did not exceed Rs 25 crore would get immunity from the taxation. The earlier limit was Rs 10 crore.

But last week, a Bengaluru-based startup was refused an exemption and asked to cough up Rs 15 lakh on the ground that the exemptions announced by the DIPP were withdrawn and that the company was liable to pay. Only when the founders appealed their case, it was found that the assessing officer had made up this “withdrawal” as there was no actual announcement from the government.

ET has seen a copy of this notice. In a WhatsApp group called Startup Warriors, several startups have said that in spite of having exemption certificates, they are being asked to pay tax over their investments. Income-tax officials could not be reached for their comment.

“So assessment officers saying exemption notification withdrawn, Start Up India saying exemption notification inapplicable for us & finally we’re at the mercy of each tax officer’s individual interpretation. Then what was the whole point of startups being granted an exemption?” asked Nikunj Bubna, founder of Wow-Box, a startup.

Bubna said his previous venture ‘Whats Extra India’ was shut down because his investors backed out over angel tax. Bubna has also been allegedly blocked on Twitter by government official Ramesh Abhishek of Start Up India for raising this issue multiple times on the social media platform. Efforts to reach Ramesh Abhishek of Start Up India proved futile.

Bubna added that if companies have an exemption given on conditional declarations, the provision should be honoured and has to be communicated to the tax officials.

“I am glad that angel tax issues have got the voice they deserve over the past six months, including in the budget recently. This seems to have addressed the issue, but there is very little relief or clarity for thousands of brave startups including ours that still face demands, where cases are in appeals stage and even where their money has been withdrawn from their accounts,” said Varun Gera of HealthAssure, a startup working in primary health care aggregation.

The founder of the Bengaluru based startup that got the incorrect notice from the tax department told ET that the firm is already in the process of shifting its operations out of India.

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