‘Angel Tax’ No More for Start-ups

In a surprising turn of events post the Google Tax, the government has announced the removal of 'Angel Tax' for investors providing funding to start-ups!

Angel tax in all simplicity, was the tax levied upon start-ups when they received angel investments. Start-ups were paying up to a staggering 33% tax.

For years, the venture capital industry had been urging for the removal of the tax as it was a major deterrence to investments in the start-up ecosystem.

However, is everything truly just rosy?

Will you benefit from it?

Of course there’s a catch. Unless you are a certified start-up, you have little reason to rejoice.

According to the new policy, only firms which are classified as ‘start-ups’ under the new government regulations will be eligible for the tax exemption or other taxation-related benefits. 

If you as a start-up want to avail the tax exemption benefits, you would need to get a certificate from the Inter-ministerial Board of Certification.

The criteria for the certificate is:

• Being not more than five-year old.
• Having turnover of not more than Rs 25 crore.
• Working towards innovation and commercialisation of new products or services.
• Being driven by technology or intellectual property.

A pretty hefty criterion to fulfil! But only when your company meets these will you be considered as a start-up.

Moreover, the tax exemption does not apply to previous investments and thus they would still be taxed as before.

So, is it really a step towards boosting start-ups?

The immediate concern for firms now is to make themselves ‘eligible’ for the exemption but what about the ones that are already crumbling under the angel tax burden? What about the ones who could not be certified?

How would it affect the start-up ecosystem?

According to Sandeep Jhunjhunwala, associate director, BMR & Associates LLP, the policy will actually only benefit 2-5% of all start-ups in India.

The irony is that only about 70-80 start-ups have applied for certification and usually just 1-2% of them are likely to get certified. Proving innovation in their products or services is not the easiest but a primary condition for issue of the certificate.

Perhaps a better approach would have been eliminating the tax altogether for present and future investments. Or how about making the certification process a little easier on start-ups, with a less rigid criterion?

With all said and done, the policy is not all that bad. The correction will surely aid in the growth of start-ups and encourage more investments. But there is definitely more room for improvement in policies for the start-up ecosystem.