Angel tax becoming a bane for start-ups across the country

Hyderabad: Investment in start-ups is considered as income and because of this, a sizeable portion of the funds raised by start-ups have to be paid as ‘angel’ tax. There is apparently no precedence anywhere in the world where an investment is treated as income and taxed in the hands of the company, except India.

Members of start-up ecosystem have started a petition “Save Indian start-ups” on change.org. Some start-ups in the city also reportedly received assessment notices in the past year to pay tax on the funds raised.

Mr Jay Krishnan, CEO of T-Hub, said, “The big point is that everybody is hoping for the angel tax to go away and the Hyderabad ecosystem is no different. The problem is that in the hands of the investee, it is treated as income. Several announcements have been made about revising the angel tax. If that comes through, it will be great.”

The government probably fears that if there are no checks and balances, black money will flow into start-ups massively. People will invest in start-ups at super high valuations just because they can pump much more money into a company and then use other means to turn it into white. A serial entrepreneur who spoke on condition of anonymity, said, “In this whole charade, start-ups have the most to lose, and investors have the most to fear and ultimately, the ecosystem is disrupted. The problem is that the government wants the start-ups to do the heavy lifting. A start-up founder is an entrepreneur with so much to do and doing IT level due diligence on an investor is neither in their interest or their area of expertise. Furthermore, no start-up founder would be courageous enough to ask a HNI (high net worth individual) for his source of funds or income tax details.” An investor is already paying income tax and whatever is left after paying is what he invests in a start-up. In effect, the investor is being taxed twice, once on income, second on investment.

Srikanth Perepu of Hyderabad Angels said efforts are being made to help the government understand the repercussions of this. “When investors are part of angels network, they are directed through the company’s bank accounts. There is no way that any kind of cash component can influence and the colour of money can be traced. We should hear something favourable in the near future.”

Some companies are setting up operations outside the country for taxation and other reasons. Says Saurabh Marda, co-founder of Freyr Energy: “The range of investment instruments that international investors can use to fund start-ups in this country are currently very restricted, which has a negative impact on growth. Companies are left with no choice but to explore setting-up holding companies outside India. This creates tax complications at the time of investment rounds and exit/buyouts. Extending access to collateral free capital beyond Rs 2 crore would encourage the growth of start-ups.”