Indian Startup Founders Lose Sleep Over Angel Tax

Raising funds from venture capitalists used to be a challenge for Indian entrepreneurs. Now, dealing with “angel tax” notices is their latest problem.

Over the last few weeks, over 150 startups have received notices from the Income Tax Department, asking them to clear taxes on their angel funding.

This isn’t the first time that these notices have been issued. Many startups received them last year, too—for which litigation is pending in some cases.

Pune-based True Elements, which raised Rs 1 crore in angel funding in 2015, is one such startup.

Sreejith Moolayil, co-founder of the health food startup, said that he received a Rs 40-lakh notice. “We’ve filed an appeal, the case is still going on, as there is a backlog already,” he said, adding that it poses a distraction, apart from wasting money and time.

The issue, according to Padmaja Ruparel, co-founder of Indian Angel Network, could kill the startup ecosystem. While the Department of Industrial Policy and Promotion, NITI Aayog and Securities and Exchange Board of India are doing a lot to enable high traction in startup ecosystem, tax is the real devil in the pact, she told BloombergQuint over the phone. “It’s completely crippling the entire work the government is doing overall for startups.”

Vipul Singh, co-founder of the drone startup Aarav Unmanned Systems, said this is an added liability to the founders. Singh, who received a tax notice last month, pointed to the lack of a standard procedure. “Everything is at the discretion of the assessment officer.”

Even the founders of failed startups haven’t been spared. The co-founder of a Bengaluru-based startup, which shut in 2016, said on the condition of anonymity that he’s grappling with a tax notice of Rs 1 crore that he received last year. I’m in a fix because there’s no clarity in policy and the case is ongoing, he said.

Padmaja said this will also lead to outward migration of Indian startups and even angels investing overseas. “Some of the investors are saying that they will rather invest overseas.”

Many industry leaders, investors and startup founders called the angel tax “draconian” on Twitter.

In response, Union Minister Suresh Prabhu said on Twitter today that the Commerce and Industry Ministry has “taken up the issue of angel tax.”