The Angel Tax imposed on start-ups has been the talk of the town lately. Various start-up founders have received demand notices from the tax authorities which plans to tax the capital receipts in the form of Income when the tax authorities believe that the amount is in excess of the value of the company.
What is Angel Tax?
In 2012, the then Finance Minister Pranab Mukherjee introduced a tax on unlisted companies which aimed at raising funds from investors (the 'angel investors") who invested in these companies with the objective of gaining significant returns. Since many companies used this route to launder money and raise funds at excessive valuations, the tax was imposed to arrest such money laundering.
Angel Tax is a tax payable by the unlisted companies who raise funds via issue of shares where the share price is believed to be in excess of the fair market value of the shares sold.
What is a Startup?
An entity shall be considered as a Startup:
(i). Upto a period of 7 years from the date of incorporation/registration, if it is incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India. In the case of Startups in the biotechnology sector, the period shall be upto 10 years from the date of its incorporation/ registration.
(ii). Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded Rs. 25 crore
(iii). Entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.
Provided that an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’.
What's the issue?
This angel tax is now considered to be a major issue in the start-up world. Although this receipt is a capital receipt by all means, the tax authorities consider this as an Income in the hands of the company.
Further, the Fair Value prescribed under the tax laws is the Net Assets Method, which is hardly the method followed to raise funds for almost any start-up. The Net Asset Method takes into account only the historical performance of the company while valuation should always consider future earning capacity of the company.
Most of the start-ups negotiate the funding with the investors who usually have high negotiating power with deep pockets. They tend to negotiate a higher stake against a lower funding.
The tax authorities have sent notices to various start-up founders and have questioned the angels as well as valuers on how they've arrived at the value.
The move is a big kick to the start-up India initiative which the government claimed to have taken. After a lot of noise, the Government has assured that the tax authorities will "go easy" to implement this rule. With the elections just round the corner, it remains to be seen if the government will take this off this budget or not.
What is Angel Tax?
In 2012, the then Finance Minister Pranab Mukherjee introduced a tax on unlisted companies which aimed at raising funds from investors (the 'angel investors") who invested in these companies with the objective of gaining significant returns. Since many companies used this route to launder money and raise funds at excessive valuations, the tax was imposed to arrest such money laundering.
Angel Tax is a tax payable by the unlisted companies who raise funds via issue of shares where the share price is believed to be in excess of the fair market value of the shares sold.
What is a Startup?
An entity shall be considered as a Startup:
(i). Upto a period of 7 years from the date of incorporation/registration, if it is incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India. In the case of Startups in the biotechnology sector, the period shall be upto 10 years from the date of its incorporation/ registration.
(ii). Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded Rs. 25 crore
(iii). Entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.
Provided that an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’.
What's the issue?
This angel tax is now considered to be a major issue in the start-up world. Although this receipt is a capital receipt by all means, the tax authorities consider this as an Income in the hands of the company.
Further, the Fair Value prescribed under the tax laws is the Net Assets Method, which is hardly the method followed to raise funds for almost any start-up. The Net Asset Method takes into account only the historical performance of the company while valuation should always consider future earning capacity of the company.
Most of the start-ups negotiate the funding with the investors who usually have high negotiating power with deep pockets. They tend to negotiate a higher stake against a lower funding.
The tax authorities have sent notices to various start-up founders and have questioned the angels as well as valuers on how they've arrived at the value.
The move is a big kick to the start-up India initiative which the government claimed to have taken. After a lot of noise, the Government has assured that the tax authorities will "go easy" to implement this rule. With the elections just round the corner, it remains to be seen if the government will take this off this budget or not.
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