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Is a quirk in the angel fund tax exemption blocking startups from acquiring and growing?

While this issue has been raised by startups before, the government's response hasn't exactly been reassuring even though it had previously signalled more flexibility for angel and investments. In 2019, the Indian government said in Parliament that angel investments are exempted from taxation under the Income Tax Act, 1961. "Startups receiving investments from Ventures Capital Fund are exempt from taxation as per provision of Section 56, (2) (vii b) of Income Tax Act 1961. Angel Fund is sub category of Ventures Capital Fund under Category-I Alternative Investment Fund (AIF), hence, [it is] eligible for the same exemption," Minister of Commerce and Industry Piyush Goyal said in a written reply. But as one angel investor recently found out, a quirk in the law means that if companies want to avail of this exemption, they must give up a lot of ways of deploying that capital. Kushal Bhagia, a venture capitalist at First Cheque, pointed out on Twitter that "If your startup has raised Angel money, you can’t invest that money in Liquid funds - if you do - the Angel Tax exemption doesn’t apply to you." Indeed, as a February 19, 2019 Gazette notification by the government states, "A Startup shall be eligible for [an exemption on taxation of angel tax investments] provided it has not invested in [...] shares and securities." (emphasis notification's) The notification may limit startups who want to use their funds to acquire equity in other companies in order to grow rapidly. "It is an issue," Dhruva Rotti,…

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