What is the issue?
- Indian business community is disappointed due to the Angel tax which is regressive in nature.
- Union government need to design a tax such that it will not affect the cash flow for a start-up.
What is an Angel Tax?
- In India an angel tax was introduced in Union Budget of 2012 under the Finance Act 2012.
- It is a 30.9 % tax levied on investments made by external investors in start-ups or companies.
- Under this tax the entire investment is not taxed only the amount that is considered above “fair value” valuations of the start-up, classified as ‘income from other sources’ in the Income Tax Act of India.
- The tax will be charged both on cash investments as well as on share premium paid to acquire new shares in a company that the tax authorities regard as excessive.
What are the reasons behind the implementation of Angel tax?
- Angel Tax was introduced in 2012, it was when the general public was convinced that the entire administrative machinery of the Government was steeped in corruption.
- At that time every facet of public policy had come to be clothed with the miasma of personal profit rather than genuine public interest.
- This was after all the era of the Commonwealth Games scam, the 2G scam, the coal-block allotment scam and so on.
- The income tax department considers that the present value of all future cash flows in the business is a lot less and therefore seeks to impose a tax on such perceived excess premium.
- That a tax on invested capital is against all accepted notions of what constitutes a tax on income, and is beyond dispute.
What are the concerns with Angel taxes?
- The problem arises because start-ups are often valued subjectively on the basis of discounted cash flows, without taking into account intangibles like goodwill.
- This can cause differing interpretations of “fair value” and leave start-ups vulnerable to unduly high taxes because the taxman feels the investment is too high over their valuation.
- Angel taxation is a major thorn in the side for many ventures and has forced many angel investors to shy away from offering financial support to start-up dreams.
What measures needs to be taken?
- Government need to design a system around the provisions of an ‘angel tax’ regime with none of the cash flow implication that such a tax entails:
- That excess share premium, such as it is, will be recognised as income.
- The resultant figure of tax will however not trigger any cash pay-out but instead will be recognised as a deferred tax liability in the books of the enterprise.
- The outstanding tax obligation may be permitted to be liquidated against actual fixed capital expenditure or incremental working capital needs through suitable accounting entries.
- Thus the venture capital industry hopes for an emphasis on adverse cash flow consequences of the proposal be mitigated in some way.
Source: Business Line
