In order to give a push to entrepreneurship in the country, the government is thinking about shielding startups floated prior to 2016 from the so called angel tax. The finance ministry has started discussions with the Department of Industrial Policy and Promotion (DIPP) on the certification of genuine startups to help with this. The government has also asked tax officials not to pursue cases against startups.
“We had (earlier) said we will recognise startups only after 2016. We have sent a proposal to the DIPP. If DIPP agrees, then we will not make any adjustment for startups set up before 2016,” said finance secretary Hasmukh Adhia. “Somebody has to examine it if it is a genuine case of valuation... If they are recognised by the DIPP, we will accept,” added Adhia.
The concept of angel tax was introduced in 2012 by the then finance minister Pranab Mukherjee and it is applicable on the capital raised by unlisted companies from any individual against an issue of shares in excess of the fair market value.
The tax law take the line that this excess amount is akin to ‘income from other sources’ and should be taxed under Section 56 (II) of the Income Tax Act.
The tax is not levied on startups recognised by the DIPP under the Startup India policy announced last year. Adhia said tax authorities are not aggressively pursuing cases against startups.
“On the pre-2016 cases where assessing officers have given notices, we have said no one will proceed further till the first appeal is decided at appellate level,” he said
The Central Board of Direct Taxes (CBDT) chairman has accordingly instructed assessing field officers against precipitate recovery action. “So, let it meet with judicial scrutiny,” Adhia said.
He also said it was wrong to characterise the levy as an angel tax.
“We take valuation both on book value as well as discounted cash flow, certified by chartered accountant... If you get a valuation which is higher than DCF value, then we tax it. This is not an angel tax — this is an anti-evasion measure for us,” he said. “But we have said that no adjustment will be made if it is a DIPP-recognised startup.”
Venture capital funds and non-residents can pay more than the book value and not face tax.
Experts said the valuation of any startup is based on various assumptions by promoters and investors. The nature of such businesses is such that their fortunes fluctuate, directly impacting valuation, the experts said. The government said it accepts valuations made by certified chartered accountants.
Industry, including the Nasscom lobby group, had lobbied against the provision before the Budget.
“In order to avoid disputes and litigation, and to provide a favourable investment environment, it is necessary to carve out an exception for the investments made by angel investors in startups,” said Vikas Vasal, national leader, tax, Grant Thornton India.