Startups write to PM Narendra Modi for abolition of tax on angel investments

Industry think tank iSPIRT has written to Prime Minister Narendra Modi urging the government to abolish tax on angel investments that has "victimised" many startups and poses a "serious threat" to the Start Up India movement. ISPIRT, representing more than 60 startups in its letter, highlighted that in the last two years, many startups that have raised angel funding in AY2015-16 and 2016-17 have received notices from the Income Tax department under Section 56(2)(viib) of the I-T Act.

It added that the notices primarily question the high share premium at which the shares have been allotted during the angel funding.

"Startups are in distress and many feel victimised mainly due to the subjectivity, cost and arbitrariness involved in the implementation of this anti-evasionary measure which treats every assessee as guilty until proven innocent".

The remedial measures available are not timely or viable for them, the letter noted adding that some startups have even been forced to shutdown due to it.

"The Start Up India Movement is under serious threat, the situation is grave and it will slide down further if immediate structural policy measures are not taken to halt this. Angel investors who support innovation by making risky investments are incentivised in many countries, but here in India they feel harassed," it said.

ISPIRT further said if abolishing angel tax or Section 56(2)(viib) altogether is not possible immediately, then to safeguard genuine investments in startups, it should be modified.

"If the 'Angel Tax' issue is not arrested immediately, then this will adversely affect the number of startups in India in the next 3-4 years and derail the entire Startup India movement," it warned.

According to official sources, the government has eased the procedure for startups to seek income tax exemption on investments from angel funds as part of efforts to address concerns of these budding entrepreneurs.

A formal notification to this effect would be issued soon by the Department of Industrial Policy and Promotion, they added. 

To seek the exemption, a startup will apply, with all the documents, to the DIPP. The application of the recognised startup shall be moved by the department to the Central Board of Direct Taxes with necessary documents.