No relief for startups with angel tax orders

BENGALURU: At least 250-300 startups that have already got tax payment orders will have to go through the appeal process since there would not be any blanket approval given to them, even as the government has not moved on the contentious Section 68. This has left entrepreneurs and investors waiting for more relief a day after the new norms were announced.
Commonly known as ‘angel tax’, the issue gained ground once again in December last year when the tax department started sending notices and orders to several startups demanding payouts. Startups that have got only tax notices are fewer, pegged at around 2,000, and can get relief under the new norms.

Many startups were expecting an additional announcement from the tax department that would have granted them relief from existing tax orders, which come after tax notices. Entrepreneurs and early-stage investors feel that leaving out startups with existing tax payment orders from the new norms would be detrimental to these companies as they will have to fight a long legal battle. They said some of them might even be forced to shut down.

The founders of multiple companies, who have got such orders, said appeals can take a year or even more in many cases.

"If one disagrees after tax tribunal orders, it can go to higher courts which then takes its own time before a judgement is made,” said the founder of a startup said who has got a tax demand of Rs 40 lakh.

As per industry sources, the number of affected startups with tax orders could be higher but initial data suggests the rough estimate of about 250-300 such startups. The startups which have just got notices, pegged at around 2,000, can get relief under the new norms.

Some of the entrepreneurs also feel the conditions around where a startup can invest the raised capital could also throw challenges. Typically, startups put part of the capital raised not immediately needed in fixed income mutual funds for higher returns as part of treasury management.

Industry body Indian Venture Capital Association (IVCA) said that the notification does not address the contentious section 68 and provide relief to startups currently dealing with payment orders. “Start-ups who have and will receive investments from AIF Category II and other sub-categories of Category I AIF are still outside the purview of the automatic exemption,” it added.

Startups also cannot create wholly-owned subsidiaries for fund-raising process, which founders feel is restrictive.

“Another thing that must be re-looked at is the clause that excludes any startup to make a capital investment in another company, now and in the future. This is likely to limit operating flexibility of startups in having wholly owned subsidiaries - such genuine business purposes must be carved out," said Alok Mittal, co-founder of Indian Angel Network who also runs his fintech startup Indifi.

While the tax department has asked its officers not to recover the money until appeals are decided, avoiding cases like Travelkhana and Babygogo where money was withdrawn from the bank accounts by tax officials, it is not in favour of giving a blanket approval.

“Once a tax demand is made under the I-T Act, there is no way of reversing that except through the appeal process. This new notification cannot now influence or modify an assessment (that is made already). So, process of appeal has to go through. What we are doing administratively is asking tax officers to not recover the tax demands till the appeals are decided," said Central Board of Direct Taxation (CBDT) member Akhilesh Ranjan.

The government on Tuesday eased regulations for startups with new relaxations claiming it will help the domestic startup ecosystem with measures like allowing startups to claim a three-year tax holiday during a 10-year period, instead of a seven-year block. It also allowed large listed companies and alternate investment funds can now invest any amount in startups without worrying about tax scrutiny on valuations, while angel investors can infuse Rs 25 crore.