Startup investments: Angel investors seek more sops from DIPP

Angel investors are seeking a further relaxation in rules to alleviate the impact of the angel tax on startups even as uncertainty prevails over what would be construed a fair valuation


New Delhi: Angel investors are seeking a further relaxation in rules from the department of industrial policy and promotion (DIPP) to alleviate the impact of the angel tax as uncertainty prevails over what would be construed a fair valuation.

Angel tax is levied on investments made in unlisted firms at valuations considered higher than the fair market valuation. The tax was introduced through the Finance Act, 2012, as an anti-abuse provision as the government sought to stop the practice of issuing of shares in unlisted companies at a high premium. Tax is levied on the capital raised by such firms, which is classified as income from other sources and taxed at 30%.

Although initially introduced to prevent politicians from accepting bribes by issuing shares in unlisted firms owned by them at a premium to other investors, the angel tax has impacted several genuine startups, with more than 30 receiving tax notices.

This is because start-up valuations are typically based on future potential and methods of quantifying that may vary. After the tax department decided to exempt companies classified as startups by the DIPP from the ambit of the angel tax, investors have been hoping for a further easing of rules by DIPP.

In a circular last week, DIPP had issued clarifications on the turnover of the companies and the level of investments by angel investors that would qualify for a relaxation.

Padmaja Ruparel, president, Indian Angel Network, said the start-up industry is looking for further relaxations to escape Section 56 of the Income Tax Act which deals with the so called angel tax. At present, a firm has to define who its investors are, merchant bankers have to give valuations and an inter-ministerial board has to give its approval for a start-up to be classified as one by DIPP, she said.

“But how will the merchant banker arrive at the valuations. The inter-ministerial board, under the previous circulars, only approved around 1-2% of the cases,” she said.

Ruparel was part of a panel debating angel tax in the “India investment conference” organized jointly by industry chamber Assocham and the Private Equity and Venture Capital Association of India. “The person who values the firm is not going to offer on what the company has done but what it can create—the potential, innovation. It is based largely on intelligent assumptions. Angel tax undermines that,” she said.

Aviral Jain, managing director, Duff and Phelps India Pvt. Ltd, said it’s a unique challenge even for valuation practitioners to value startups. “How sophisticated is the income tax officer to understand the industry and its patterns of revenue growth and profitability? Also, intangible assets are not included in the valuation,” he said.

Shailesh Vikram Singh, director at Seedfund, said the prevalent uncertainty could see many companies getting incorporated outside India in countries such as Singapore.


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