When PM Narendra Modi and other Indian states launched programs to develop the startups in India, there was a general feeling among the startup communities in India that things would only get better from then on until the IT (Income Tax) department of India decided a couple of days back, to enforce tax on the angel investments, the startups in India secured since 2012! This has caused shock waves (metaphorically speaking) to ripple through the startup communities in India because first of all, getting angel investments itself is a big challenge for the startups in India and secondly the startups feel that the evaluation of startups is done unfairly (i.e., they feel that they become overvalued) after securing angel investments, causing them to pay unfair amounts of tax, which they could have otherwise used for so many other constructive purposes.
A lot of startups in India have received notices from the IT department during the last couple of days, requesting them to pay tax, in proportion (30%) to the angel investments they had secured. The startups have also complained that they have wasted a lot of time and energy over the past two days protesting against this notice rather than investing their time and energy constructively which could have benefited them in several ways. Yesterday, (20/12/2017) former Infosys BoD, Mohandas Pai, tweeted to the Finance Minister, Arun Jaitley, that a lot of startups are upset over this move taken by the IT department and may even shift their business overseas as a consequence.
“Not even a single startup is profitable in the lest few years despite raising capital and data shows that 80% of them have shut down. If IT department thinks that rasing capital is profitable then no investor would be willing to put their money in startups. It is like sucking blood from person on death bed ” said Jayadeep Reddy, Indian CEO.
Not surprisingly, Mr. Pai had invested in several Indian startups who have received notices from the IT department, requesting them to pay tax for angel investments secured as far back as 2015! Mr. Pai also complained that the appeal process against Angel Tax is very elaborate and time-consuming, taking upto 15 years to resolve! The controversial Angel Tax was introduced as far back as 2012 but the Central Board of Direct Taxes decided to enforce it just a couple of days back. According to the angel tax norms, any startup which receives an angel investment from an Indian investor, over its evaluation, should pay 30% tax on the angel investment amount received! This tax will surely drill deep holes in the pockets of the startups and stem their growth and innovation. Last year (2016) the Government of India announced that startups which meet certain criteria will be exempt from this tax. However, this notice came with a lot of riders and there is a lot of confusion about it.
The IT department has questioned the valuation certification of many startups, forcing them to hire a CA and spend lakhs of rupees on him/her unnecessarily. According to Mr. Pai, the IT department can certainly question the legitimacy of the money but not the valuation.
“The IT department tells them to go for an appeal and avoid paying the fee. But that will take up so much of time and resources for a young company. That is borderline harassment”, Ritesh Bawri, founder of the analytics firm, Quantta Analytics said.
“Entrepreneurs in India are techies; they don’t have much knowledge about this. They are scared of the government now”, Mr. Pai said.
Mr. Pai also tweeted to Finance minister Arun Jaitley
@arunjaitley Sir Start Ups are getting harassed by IT for raising Capital,threatening to consider it as income!very bad scene and very many are angry and upset,may shift overseas.Appeal process broken, takes 15 years. Pl intervene, @PMOIndia @narendramodi @amitabhk87 @rsprasad
— Mohandas Pai (@TVMohandasPai) December 19, 2017
This is a very bad move taken by the IT department of India which will drill deep holes into the pockets on Indian startups and stem their growth and innovation. The Finance Minister, Arun Jaitley, must consider this tax seriously and take corrective action as soon as possible. Otherwise, Indian startups may shift their business abroad, which may lead to loss of jobs in India and if that happens, the startup bubble in India will surely burst. A few Indian startups have even raised angel investments from foreign investors instead of Indian investors recently as a consequence of the notorious Angel Tax.