Recently, a group of entrepreneurs intensified their campaign against ‘Angel Tax’ levied on start-ups. In a letter sent to the Prime Minister of India, entrepreneurs plead to the central government to mediate and rectify the “faulty provision of Sec 56(2) (viib) of the I-T Act which was brought in 2013.”
According to the letter sent to the PM, entrepreneurs feel victimized due to the cost, subjectivity, and arbitrariness involved in the implementation of this anti-evasive measure that treats every assesse as guilty until proven innocent.
Every start-up needs funding in the initial years, and thus many approaches to angel investors to provide the seed capital requires running a business.
Entrepreneurs have pointed out that in many cases; assessing officers do not give much weight-age to the ‘discounted cash flow’ method and instead prefer ‘book value method’ to do a valuation. This ‘book value method’ is unsuitable for technology start-ups with asset-light business which many times levy a tax or penalty which together exceed 100 percent of the amount raised through angel funding, said an entrepreneur. This is the reason many start-ups have been forced to shut down, and few others have started to move towards more friendly regimes like Singapore and more, they said.
In the last four years, the central government has been very focused on promoting start-ups. In fact, more than 39,000 ventures have raised more than $38.5 billion in the last few years and created a value of $130 billion. However, instead of receiving incentives as materialize in many developed countries- angel investors, who fuel the growth in any start-up feel harassed due to Angel Tax. “If immediate policy reforms do not take place and ‘Angel Tax’ issue not resolved on immediate basis then it can derail the momentum of entire Start-Up India campaign,” they said.
The group said, there is a dire need to modify Section 56(2) (viib) to safeguard the genuine interest of the start-ups. Entrepreneurs want that the investments received by start-ups that meet DIPP’s level 1 and which are raised from resident investors to be removed from the purview of the act.