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Start-ups are facing significant headwinds because of the amended angel tax provisions that include foreign investors. The industry has asked the government for an objective framework for exclusions to foreign investors and to rationalise valuation report requirements under the Income tax act, 1961.
Siddarth Pai, Founding Partner 3one4 Capital & Co-Chair, Regulations Affairs Committee, IVCA said, “FEMA and Company’s Act, 2013 have moved to ‘internationally accepted valuation methodologies’, whereas Income Tax Act still relies on Discounted Cashflow (DCF). DCF is appropriate for stable, cashflow-generating companies. Start-ups do not fall under its ambit. This has been accepted by renowned valuation professionals such as Aswath Damodaran as well. A tax on capital is the last thing the Indian start-up ecosystem needs amid the ongoing funding winter.”
Editorial. Angel tax is draconian and unfair on start-ups
Misapplication
He added that angel tax has long been the bugbear of the Indian start-up ecosystem. “What was conceived of as an anti-abuse measure in 2012 became notorious for its misapplication on Indian start-ups raising capital by issuing shares at a premium. Angel tax is a tax on capital, not income. Its reliance on a valuation report and adherence to projections in the valuation report as the basis for application flies in the face of actual start-up operations, marked by uncertainty and pivots,” Pai noted.
Further, Dr. Apoorva Ranjan Sharma, Co-Founder & Managing Director, Venture Catalysts, Co-founder, 9Unicorns said, “India’s start-up sector needs an enabling policy environment, especially amidst global headwinds. Angel investments are usually high-risk, and also demand significant mentorship from investors. Therefore, as an asset class, they deserve differential treatment and taxation. It is important for the government to support investors that provide funds, resources and guidance towards growing star-tups that are bound to trigger economic growth for India.”
The Finance Minister had proposed in the Budget that the extra premium received by an unlisted company in India by the sale of shares to a foreign investor will be recognised as “income from other sources” and will be taxed. As per the rule, any extra premium that the investor pays over the start-up’s fair market value (FMV) will attract a 20 per cent tax.
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