#Budget2019: What Makes Angel Tax Every Start-upreneur's Nightmare & Why The Indian Start-up Ecosystem is Rooting for its Complete Abolition

The tax which was introduced in 2012 budget is now seeing a slow death with absolutely no takers

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Angel Tax has become one of the most dreaded taxes in India. The tax which was introduced in 2012 budget is now seeing a slow death with absolutely no takers. Entrepreneur India decodes why the start-up ecosystem abhor this tax and are rooting for its complete eradication.


What is Angel Tax?

To understand Angel Tax, one needs to understand angels or angel investors. They are early-stage investors in a start-up who invest relatively smaller amounts at a risk which, if things go right, can be paid off in big numbers.

The tax levied on the capital raised by issue of shares through off-market transactions by start-ups on angel investments is called Angel Tax. Under the Income-tax Act, 1961, if the issue of shares happens at a valuation higher than the market value, then an amount is raised as part of the tax. The tax is not a small amount but is imposed at a staggering rate of 30.9per cent.

For example, if a company raises INR 60 cr in its funding with the issue of INR 1 lakh shares @INR 600/share but the value of shares should be INR 300 according to the market, then the angel tax should be levied on the additional INR 300 which is over and above the market valuation.

By taxing the excess, start-ups lose out on a big amount slowing the process of business growth, something very essential to start-up entrepreneurs.

Why Entrepreneurs Oppose It?

Entrepreneurs oppose imposing of Angel Tax simply because of the fact that it limits the investment prospects of start-ups, says founders of Dockabl, Samarth Masson & Sanjeev Grover, "With this budget, we expect the government to relook at taxes like Angel Tax. Providing rebates and incentives can encourage investors and private incubators to invest in startups."

The tussle between the income tax department and the Indian start-up ecosystem hasn't reached a fruitful conclusion. The former follows the traditional and age-old calculations while the latter has to comply at a reasonable financial loss.

However, this year gave many some respite as 702 start-ups were exempted from this much-talked about tax.

Rachit Chawla, Founder & CEO, Finway, picks this point and further adds, "The process of smoothening the tax issues in funding was started and we expect that there will be a fast implementation of the procedures to ease startup funding." He also believes that the momentum started with 'Start-up India' that enabled self-certification, income tax exemptions, rebate in filing patents, etc should not deaccelerate.

India has a growing ecosystem of Indian start-ups. Infact, with nearly 7000 start-ups, it is on its way to becoming a "start-up nation.'

Pradeep Dadha, Founder and CEO of Netmeds.com, says, "When it comes to the start-up ecosystem, the government provided some relief to early-stage startups with the relaxation of Angel Tax. But the industry still feels that complete elimination of Angel Tax will work in favour of the rapidly expanding ecosystem."

Everything boils to having a supportive ecosystem for start-ups where they can grow, flourish and prosper. Tarun Wig, Co-founder Innefu Labs, says, "Angel tax should be done away with for the early years of a start-up. GST process should be more streamlined and refunds should be done at a faster pace."

Regulation in this arena will definitely result in more positive cash flow believes the startup community.