Can Flipflop Tax Policies Create Market Uncertainties For Startups?

One of the main challenges faced by the entrepreneurs in India is the uncertainty of the tax regime, says Sanjay Kumar, MD & CEO Elior India
Can Flipflop Tax Policies Create Market Uncertainties For Startups?
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The year 2018 was a mix of good and bad for the startup ecosystem in India. Even as the central government made efforts to boost the ecosystem, the flip-flop in rules related to angel tax and other tax issues caused problems for the startup ecosystem. According to recent media reports, the Central Board of Direct Taxes (CBDT) has now directed regional heads of the IT department to set up startup cell at the offices and handle the issues of startup taxes with “utmost care”.

According to reports, the board has also asked the regional heads to submit a report on the preliminary action taken to resolve a startup grievance and the final action report should be submitted to CBDT within three days.

While finance minister Nirmala Sitharaman announced that startups registered under DPIIT have been exempted from angel tax, several industry players according to various reports have said that the tax might be applicable under certain situations. “There are still things that startups do in their ordinary course of business that can deny them exemption from angel tax,”Siddarth Pai, founding partner at 3one4 Capital told The Economic Times.

In August, Finance Minister Nirnala Sitharaman had announced that angel tax would not be applicable for DPIIT registered startups. Later in a consolidated circular, the CBDT clarified that cases against startups registered with DPIIT will be dropped and review officers will be doing follow-ups. Also, a tax officer would need permission of its reporting officer and senior before scrutinising any unregistered startup.

Issues Due To Uncertain Policies

According to the ET report, startups which have given salary advances or loans to employees will not be exempted from angel tax. Startups engaging in M&A activity will also not be exempted.

“Startups have in the past suffered on account of angel tax demands. While the government has come out with measures to exempt Startups from such angel tax, that too retrospectively, there is a need for clarity on some of the qualifying conditions,” said  Indruj Singh Rai, Partner at Mumbai-based law firm Khaitan & Co. 

While speaking to Sanjay Kumar, MD & CEO Elior India, Kumar explained that how entrepreneurs should be ready to deal with regulatory uncertainties if they plan to have a business in India. “Biggest challenge in being an entrepreneur in this country is to figure out the mind of the government because you do not know what will change and how. It all happens overnight,” Kumar said. “Nobody can operate in an environment which is so uncertain where tax laws change by the day and there is no predictability about large investment amounts,” he added.

According to Kumar, one of the main challenges faced by the entrepreneurs in India is the uncertainty of the tax regime.

The Issue Related To Angel Tax

According to the Section 56 (2) (vii)(b) of the Income Tax Act which is also known as angel tax , if a private company issues its shares at a price more than its fair market value, the excess amount will become taxable as it would be considered as its income from other sources. About angel tax of 30% will be levied on the excess amount raised by the startup. 

Angel tax has always been a debate in the startup ecosystem but the issue was further fueled after the Ministry of Corporate Affairs (MCA) sent tax notices in November 2018, to more than 2,000 startups who raised money since 2013. 

Following this, startup founders and angel investors took to Twitter to voice their concerns against angel tax. TV Mohandas Pai had said that the “draconian” angel tax will hamper startup innovation in the country.

According to a survey by LocalCircles, about 73% of  startups which received angel tax notice(s) had raised capital between 50 lakhs and 2 crores.

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