ADVERTISEMENT

Startups Seek Clarity From Government As Angel Tax Bedevils Them

The finance minister promised reprieve for startups, yet founders continue to remain sceptical.

An employee for a startup lies working on a laptop computer in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)
An employee for a startup lies working on a laptop computer in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

No scrutiny of valuations at which investments are made, e-verification to check identity of investors and source of funds and special administrative arrangements by revenue department for pending assessments. Finance Minister Nirmala Sitharaman used all the right words in her Budget 2019 speech, as she promised reprieve to startups on the issue of Angel Tax. But the founders of various startups BloombergQuint spoke with remain sceptical.

The government has shown the intent to solve the angel tax issue but we have seen intent in the past as well, Sreejith Moolayil, co-founder of health food startup True Elements, said. “This doesn’t stop taxmen from knocking on our doors. This has to stop and there has to be a permanent fix for this.”

The angel tax notices stem from Section 56(2)(viib) of the Income Tax Act. Titled “Income From Other Sources”, the section says any excess consideration received by a company will be treated as its income if it issues shares to a resident at a price which exceeds the fair market value of the shares.

After hundreds of startups that received notices under this provision voiced their concerns, the Central Board of Direct Taxes had revised its norms in February this year. A startup that met the prescribed conditions could claim exemption from angel tax but the tax department’s revised directions didn’t offer relief to cases where demand notices were already issued.

Notification referred in para 4 shall apply irrespective of the dates on which shares are issued by the Startup from the date of its incorporation, except for the shares issued in respect of which an addition under section 56(2)(viib) of the Act has been made in an assessment order made under the Act before the date of issue of the notification.
Central Board of Direct Taxes in a notification dated Feb. 19, 2019.

At that time, Maulik Doshi, partner at SKP Group, had told BloombergQuint any assessment process—including showcause notices or assessment orders—prior to Feb. 19 won’t get any benefit and this notification may only have a persuasive value.

Doshi’s view proved to be optimistic. Five startup founders told BloombergQuint the exemption certificate they received after February has been of little use. Despite receiving certificates of exemption from angel tax, the commissioner and assessing officers aren’t giving any benefit in the appeal process, they said.

When startups—with demand notices issued prior to Feb. 19—went for an appeal with the exemption letter, it was rejected by the assessment officers. In other cases, tax deducted at source refunds have been adjusted against the angel tax demand, as the startups were waiting for their appeals. BloombergQuint spoke to five such businesses.

Ayush Bansal, founder of the ed-tech startup iDreamCareer, received a demand notice of Rs 1.5 lakh in December 2018. His exemption letter, received in March this year, was rejected during the appeal process on grounds the tax notice predated the exemption letter from Central Board of Direct Taxes. Sudhir Mody, founder of Pune-based Maximojo, which offers software solutions for hotels, received a Rs 50 lakh tax demand in December 2018. His exemption certificate, which was issued in February, too, got rejected for the same reason.

Dipak Samanta, founder of iServe Financial; Rajiv Mukherjee, founder of Incubate Hub; and Ashish Chaturvedi’s School Diary are all facing a similar challenge—their TDS refunds have been adjusted against tax demands on account of angel tax. The adjusted amounts range from Rs 50,000 to Rs 35 lakh.

Our TDS refund had been put on hold for the last two years, and now without any intimation we received a notice that it has been adjusted against the tax demand, Mukherjee said. This happened even as we were waiting for the appeal to move forward, he said.

Founders of startups are confused whether they should approach the Commissioner of Income Tax or not, Chaturvedi said.

There is both fear and confusion among the startups who got tax notices before February 2019. Those who have approached the tax commissioners, their appeals have been rejected, and for them, the next course of action is to approach the tribunal. But even as you wait for the appeal process, TDS refunds are getting adjusted against the demand.
Ashish Chaturvedi, Founder of School Diary

The DPIIT (Department of Industrial Policy and Promotion) officials assured startups in February that no coercive action will be taken in pending cases but nothing has changed, Chaturvedi said.

The companies who have exemption certificates are entitled to get relief before commissioners who are hearing their appeals, TP Ostwal, managing partner at TP Ostwal & Associates, said.

While commissioners cannot revise the assessment, they can stay the demand while the aggrieved party litigates their dispute. If the tax demand has been stayed and still TDS refunds are being adjusted in lieu of the angel tax demand, companies can approach high courts by filing a writ petition and challenging such an action.
TP Ostwal, Managing Partner at TP Ostwal & Associates

The exemptions announced in Budget 2019 will help future angel investments but those who brought the issue to the fore, continue to suffer as they’ve been left at the mercy of the assessment officers, Sudhir Mody of Maximojo said, adding the government must figure a way to help startups battling pending notices.