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Wednesday, 26 December 2018

Startups are the strength of the economy. They create jobs, new products, dreams and bring new ideas. Startups directly impact growth. It generates employment opportunities for youth with innovative ideas. The startups not only create new industries but also bring more revolutionary technologies over time, and that creates a stream of millionaires. 

Start-Up Scheme in India
As startups turn out to be a major source of revenue and employment, governments from across the world have been striving hard to facilitate the entrepreneurial dream. 
The government of India has launched the start-up India and Make in India initiatives which aimed at promoting entrepreneurial culture in the country. These Action plans were unveiled providing a slew of incentives for the youth to become job creators rather than job seekers. However, these schemes intended to create new era of jobs yet there is something called as angel tax which has been haunting the industries for sometime. 
What is angel tax?
In general, if a well-established business needs some crores of money for investment, they go to the bank and take a loan. Bank provides a loan based on their income and business by looking at their history.
But for startup, a person cannot get a loan with that ease. So in this case, start-up founders go and collect the loan from family members or someone else who is kind enough to spend his or her money. Few big business people or groups together (some time individually) invest in startups, and those are called as angel investors. They get equity share (company share for that invested money based on the valuation of the company). If a startup gets successful like Flipkart, apple,paytm.. etc. the angel investors get huge returns for their investment. If it fails they lose.
It’s like investing in the stock market for angels, but it’s very risky scenario. HIGH RISK, HISK RETURN.
Now when it comes to Taxation, Income Tax department has asked for 30% tax on funding received by the companies from investors. This is higher than market value, and seemed unfair. 

Why startups are in trouble?
Over the past few weeks, many startups have reportedly been receiving notices from the Income Tax department asking them to clear taxes on the angel funding they raise, and in several vases, levying a penalty for not paying Angel tax.
However, this is not the first time that this issue has come up. Startups have been raising the issue of Angel tax for years, requesting the government to do away with it. Even when the union budget was announced last year, startups were hoping for the abolishment of Angel tax.

Major Concerns
The taxation limits investors from putting their money and trust on early-stage startups, which in effect suffocates more people to come forward and start their own. The concern has been raised year after year by multiple entities, from entrepreneurs to angel investors. Many unlisted and early-stage startups rely heavily on funding from angel investors to build groundwork necessary to get further funding from venture capital group. Taxing this investment discourages and drives away angels.

What does departmental of industrial policy and promotion (DIPP) say?
Department of Industrial Policy and Promotion(DIPP) says the government is committed to ‘protecting bona fide investment into startups’. After several startups received notices from the tax department and amid talk of the return of angel tax, the department of industrial policy and promotion (DIPP) has taken up the issue with the Department of Revenue.
A press statement from the DIPP said: “the DIPP, in consultation with the Department of Revenue, has put in place a mechanism since April 2018 to grant exemption from the provisions of  section 56 (2)(Viib) of the Income Tax Act to genuine investors in recognized startups. DIPP has again taken up this matter of issue of IT notices with the DOR so that there is no harassment of angel investors or startups.
Later in April, the government had to give interim relief to startups, allowing them to avail tax concession if the total investment, including funding from angel investors, did not exceed Rs 10 crore.
Under section 56 (2) (Viib) of the income tax (I-T) Act, if a privately held company issues shares at an amount higher than the face value, or the fair market value, the difference between the issue price and fair market price is taxed as income in the hands of the startups.

IT department action
The IT department compares the revenue projections that startups give to investors while raising funds with actual performance, and the difference in share value is calculated to levy angel tax.

Startups and taxation: In the global scenario
Governments are recognizing the usefulness of encouraging and inciting angel investors to boost their startups economies to this end. Many global startups hubs, in fact, offer amazing tax cuts and incentives to attract investors.

In European, countries like Germany and UK have passed laws and implemented policies to offer generous tax incentives to startups and angel investors. Across the world. Australia’s tax incentives for investment in innovative startups (introduced in 2016) have been called “arguably the most generous in the world”. Against such a backdrop, the problems posed by India’s Angel Tax become even starker