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Govt must water down Angel Tax provision for start-ups: Experts

The Centre would do well to water down the ‘Angel Tax’ provision, and that too retrospectively,
in the upcoming Budget (Vote on Account) to alleviate the misery of thousands of start-ups that have come under the scrutiny of the taxman, say experts and economy watchers.
As an alternative, the Department of Industrial Policy and Promotion (DIPP) must tweak its criteria for recognising start-ups so that more number of them stand a chance for Angel Tax exemption, they said.
Although there are several reasons why fewer start-ups are getting the exemption from ‘Angel Tax’, tax experts feel that only the Revenue Department is now best suited to remedy the situation for start-ups on a permanent basis.
The main pain point for many start-ups is not that they are not getting recognised as ‘start-ups’ under DIPP norms, but the fact that their capital is getting treated as ‘income’ and brought under the tax net, a tax expert said.
Taxing new investments coming into a start-up by treating capital as income will kill entrepreneurship, the expert added.
Moreover, the DIPP’s norms stipulating that start-ups would be eligible to claim exemption from ‘Angel Tax’ only for proposed issue of shares is a big pain point. Start-ups are ineligible to claim Angel Tax exemptions for shares issued in the past (prior to April 11, 2018), according to DIPP.
Post the DIPP’s April 11 notification, only start-ups recognised by DIPP with a valid certificate of recognition will qualify to be examined (by the Income Tax Department) for Angel Tax exemption under the income tax law. Between April and now, only two start-ups have made the cut in obtaining such exemption.
“The angel tax provision (Section 56 of the income tax law) should get watered down in the upcoming Budget,” Anish Thacker, Tax Partner, EY, told BusinessLine. This is even as the provision was introduced as an anti-money laundering provision.
Aseem Chawla, Managing Partner, ASC Legal, said the instructions of CBDT to its field officers do suggest that the provisions of the Income Tax Act were being applied in a fairly mechanical manner without considering the actual ground realities with such start-ups.
“It is well known that the exemption from Angel Tax levy was given to those start-ups which were recognised by DIPP. It is well known that DIPP criteria has been such that only a handful of start-ups have been able to make it,” Chawla said.
Innovation factor
Another critical aspect for fulfilling the DIPP’s criteria is the “innovation” point that start-ups aspiring for an IMB recognition must establish. Many start-ups are getting rejected on the “innovation” factor and inability to convince the board that the business is scalable in terms of employment generation or wealth creation. Some experts, however, contend that “innovation” is a subjective aspect.
Nakul Saxena, Director Public Policy at the Indian Software Products Industry Round Table (ISPIRT), a think tank that works with companies and government, said: “It is not possible for a third party, who does not have a stake and who does not know about the industry very well to decide if this is innovative enough and if this will survive or not.”
According to Saxena, “When it comes to start-ups, an investor puts in money because he or she sees some value in the start-up where others might not. It could be because he or she has a background that helps in better understanding of the sector.”