The Central Board of Direct Taxes (CBDT) introduced the controversial Angel Tax as far back as 2012 and decided to enforce it during November 2017. According to this tax, Indian startups which have received seed funding from Indian angel investors, greater than their evaluation, should pay 30% of the angel investment received as tax (angel tax) to the Government of India. The announcement to enforce this tax during November 2017 caused widespread outrage in the startup community in India because firstly getting seed funding or angel investments itself is a big challenge for the startups in India and lastly the Indian startups feel that paying such a heavy tax will eat into their profits and stem their growth. The startups also feel that evaluation of startups is done unfairly by various government organizations, including the IT department and therefore Indian startups end up paying more tax to the government. The legal procedure to protest against this tax is also very elaborate and time-consuming. It takes an average time of a decade to resolve disputes related to Angel Tax by startups. This long time period makes protesting against the tax infeasible for many startups in India. It will surely make them bankrupt in the process (J).
Whether the BJP government will win the 2019 elections depends largely on the budget that’s going to be announced this March. Indian startups want the Finance Minister, Arun Jaitley, to turn into an ‘angel’ for them and remove the Angel Tax in the coming budget. The evaluation of Indian startups is done based on their net assets. Angel investors invest in startups by judging their ‘potential’ and often acquire shares (stakes) in startups for a price which is higher than their Fair Market Value (FMV). The Angel Tax taxes the higher amount bought by investors and the startup is overvalued. This is what the startups feel is ‘unfair evaluation’ for which they need to pay angel tax. According to Financial Express, Maulik Doshi, who works for SKP Business Consulting LLP, feels that the Government should waive off Angel Tax in the coming budget session to win the 2019 elections.
Ever since PM Narendra Modi launched the ‘Startup India Stand up India’ scheme in January 2016, there has been an explosion in the number of startups in India as the people felt that the scheme would create a conducive environment for the startups in India. When the Angel Tax was enforced in November 2017, it broke the hope of many startups in India, which have employed millions of people. If the people of India are left disappointed after the coming budget session in March, it could hurt the vote share of the BJP government in the various states in India and maybe even topple the existing BJP government. Hence, the Finance Minister, Arun Jaitley, would do well to eliminate the Angel Tax in the coming budget session to satisfy the startups in India which have employed millions of people.