Industry bodies NASSCOM, TiE Global, Indian Private Equity & Venture Capital Association (IVCA), Chennai Angels, India Angel Network and Rajasthan Angels have jointly written to the Union government asking it to abolish the ‘angel tax’.

Addressed to the Finance Minister Arun Jaitley and Minister for Commerce and Industry Suresh Prabhu, the letter states that the ‘Start up India’ program has run into severe implementation problems due to ‘angel tax’ imposed on startups under Section 56 of Income Tax Act. “The angel tax penalizes startups simply because premium is paid or discount given on the sale/purchase of shares,” states the letter.

MediaNama has reached out to TiE Bangalore president Ravi Gururaj, and will update this when we hear from him.

“There is no empirical evidence to show that there exists any systemic menace in this regard. If there is any investor who cannot explain the source of the investment, we suggest, by all means go after that investor but presuming every investor paying premium or getting discount should not be deemed criminal and be penalized,” says the letter (emphasis added).

The angel tax is an income tax payable on capital raised by privately held companies when the share price offered seemingly exceeds the fair market value of the shares. The tax was introduced in 2012 by the then Finance Minister Pranab Mukherjee to restrict money laundering of the funds.

Startups got tax notices despite norms

In April 2018, the government had issued a notification exempting investments of up to Rs 10 crore from the tax (for startups). Additionally, the exemption applied only when the angel investor had a minimum net worth of Rs 2 crore or an average income of over Rs 25 lakh in the preceding 3 financial years.

However, in December 2018, around 25 startups and some angel investors were served with notices from the CBDT to pay up taxes on angel funding they raised years ago.

The CBDT had then said that it was examining angel tax, and that no coercive action related to it would be taken until an expert panel resolved the issue. The Department of Industrial Policy and Promotion (DIPP) said that the government would ensure that startups and angel investors were not harassed. Further, Suresh Prabhu had said that his ministry had taken up the issue with the Finance Ministry.