Angel Investment Tax

Let’s correct angel investment tax on start-ups, writes Arun M Viswanath, a CEO at Gyalizo KE, a Chennai-based consultancy.

In these times of great excitement to push forward the startup movement in India, somehow the presence of an Angel Investment Tax goes unnoticed.

Start-up interest has caught up in all sectors, viz Government, Corporate, Academia, etc. Wherever you turn, or whichever way you go, the magic word that making round after round is “Startup”.

What is an Angel Investment Tax?

Though we think of angels and fairies in mythologies, this angel doesn’t represent them. This is a term rendered to INVESTORS who invests in good ideas – where the entrepreneur is not in a position to provide/pledge collaterals or guarantee – based on their hunch and good will on the entrepreneur. So this type of investment is considered as a high risk investment.

Angel Investment Tax was introduced in the Union Budget of 2012.

As per this tax, any fund raised by an unlisted company through equity route is taxed.

The investment will be treated as “income from other sources” under section 56(2) of IT Act, 1961 and charged the hefty corporate tax rate of 30%.

Imagine you and your friend wants to start a business. After initial setting up, you analyze and understand that you need a capital of Rs.2 million (Rs. 20 lakh) to take the product to the next stage.

Then you hunt, identify and fix up an investor, who readily invest that amount in your company in exchange for a portion of equity (shares of your company).

That investment is capital for your company.

But under Angel Investment Tax, it is considered as “income from other source” and taxed at the rate of 30%.

This reduces the investment to Rs. 1.4 million with Rs600,000 gone to the tax department

Such taxing will discourage investors.

Naturally, this Angel Investment Tax has hurt the spirit of Startup Movement.

The present government has given some relief under the Startup India initiative with a caveat that the relief is only applicable to the Startups qualified under the “Startup India Initiative”. This is still in some exceptional cases.

In the meantime, the Angel Investment Tax has created a new trend among start-ups. Many of these start-ups are registered in other tax-friendly countries and operates out of India.

With more and more Indians being involved in start-ups, we need the government to review the Angel Investment Tax in total.

This would help as young, creative and talented Indians will need financial support for building up businesses from start-ups and progress along with prosperity the country will see in the years ahead.

We wish the Indian government would review the Start-up initiative and exempt Angel investors’ from the current tax structure and allow seed monies to help blossom the country’s talent. fii-news.com