An important question for India’s thriving startup ecosystem is about to come up with the Union Budget: will the controversial Angel Tax be eventually repealed? Its elimination has apparently been proposed by the Department for Promotion of Industry and Internal Trade (DPIIT), a significant government agency that promotes entrepreneurship. The Ministry of Finance, however, has the last say.
What is Angel Tax and Why is it Controversial?
Unlisted businesses that issue shares to raise financing are subject to the angel tax. When the investment amount exceeds the shares’ fair market value (FMV), the tax becomes payable. After that, this difference is taxed at a high rate that is more than 30%.
The concept behind Angel Tax was to curb the circulation of black money and deter shell companies. However, its implementation has drawn sharp criticism from the startup industry. Here’s why:
- Stifling Innovation: Startups, especially in their early stages, often prioritize growth over immediate profitability. Angel Tax discourages investments in these companies, hindering their ability to scale and innovate.
- Valuation Challenges: Determining the FMV of a startup, particularly in its nascent stages, can be complex. This ambiguity leads to disagreements with tax authorities and unnecessary legal battles.
- Administrative Burden: Complying with Angel Tax regulations adds an extra layer of administrative burden on young companies, diverting their focus and resources away from core activities.
Industry Voices Against Angel Tax
T.V. Angel Tax has been properly defined as a “constant blot” on India’s otherwise thriving startup scene by Mohandas Pai, a partner at Aarin Capital and former CFO of Infosys. He draws attention to the policy’s contradiction, since the opposing party is calling for its repeal despite having introduced it earlier.
A Glimmer of Hope?
In 2019, the government released G.S.R 127(E) guidelines in response to the concerns. These guidelines give startups a mechanism to apply for Angel Tax exemptions. Only a small percentage of registered startups—roughly 10,939 out of 1.14 lakh—have successfully obtained exemption, indicating how difficult the process is.
The Road Ahead
The DPIIT’s recommendation to abolish Angel Tax offers a ray of hope for Indian startups. However, the final decision lies with the Finance Ministry. Here are some potential scenarios:
- Complete Removal: This would be a game-changer, fostering a more conducive environment for investment and growth in the startup ecosystem.
- Modified Guidelines: The government might consider revising the existing exemption process to streamline it and make it more accessible. This could involve simplifying valuation methodologies or raising the threshold for triggering Angel Tax.
The controversy around the “Angel Tax” emphasizes the necessity for moderation. Legitimate entrepreneurial endeavors shouldn’t be hampered by rules, even when they are required to combat black money. An enabling and well-defined legislative framework concerning the Angel Tax is essential if India wants to become a global leader in innovation. The government’s choice is closely watched by the whole ecosystem, since the next budget has the potential to bring in a new era for Indian businesses.
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