It would not be an understatement to say that since last few years Angel Tax have had a huge impact on start-up ecosystem! Over the past year there have been reports of several early-stage start-ups receiving notices from the income tax department asking them to clear outstanding dues on the angel funding received by them. This has caused a big distress in start-up community. Many angels have been asked to pay upwards of 30% of their total funding as angel tax. They have also received many notices from Income Tax department prompting them to furnish details of source of their income and also their bank account statements.
So what exactly is the angel tax?
It is the tax levied on an Angel investor who invests in a start-up based on the capital gains. It is calculated as differential of their investment and fair market valuation. Now that’s where the problem lies, how do you determine fair market valuation of start-ups?
Angel investors are generally ultra high net worth individuals or professional investors who fund start-ups for gaining stakes in the start-up generally at foundation stage or after bootstrapping rounds. The tax was introduced by former finance minister Pranab Mukherjee in the 2012 Union Budget to prevent the laundering of funds. Since its introduction, the law has been a big source of worry for both the start-up community as well as angel investors.
Impact of Angel Tax:
- Limitations on Angel Investors autonomy in structuring funding contours & terms
Since its introduction the Angel Tax has majorly disrupted the market dynamics since its introduction. Since the funding is now to be based on the criteria and limits set by the Government itself, it becomes very difficult for investors to finance start-ups as it takes away their autonomy in structuring deals.
- Taxation structure that reduces the IRR for Angel Investors
In India the government treats the angel investment as equity investment and capital gains are applicable. In Indian law, Income tax in not imposed on capital but on the profit actually, this is a big burden on start-up ecosystem. When an angel investor invests in a start-up they are issued shares. The change in the price of these shares over time decides the quantum of capital gains. Angel investors and start-ups have long demanded that Discounted Cash flow method to be applied to valuation to calculate angel tax viz a viz Net Asset Value. Government feels that the commercial negotiation between start-up and investor to determine a start-ups projected earning is highly subjective and susceptible to money laundering.
- Impact on the flow of funds to the rapidly flourishing Startup Ecosystem
Introduction of Angel tax have had a devastating impact on the country’s start-up ecosystem which was just starting to bloom around the year 2011-12. It should be noted that the number of companies being funded through angel investors had dropped by 80% during the same period, also angel funding has reportedly faced a drop of over 55%.
- Start-up Migration to other countries
Angle tax has pushed start-ups to shift their businesses to alternate destinations overseas. As some countries in APAC region provide a more friendly and conducive taxation and funding environment for start-ups to get them up and running, most also have policies to support the sales of their products and services . This is in stark contrast to the current environment for start-ups in India which has led to substantial loss of income and limitation of their opportunities to raise capital due to incessant and stringent tax laws.
Recent Amendment and Developments:
Off late there have been some relaxations for start-ups, as you know earlier, for a start-up to gain the status of start-up they should have been incorporated or registered in a period of seven years, but that period has now been increased to ten years. Their turnover limit has been increased to hundred crores from 25 crores, and not only that this new notification has done away with section 56(2) of the IT Act which restricted investment into the start-up to the fair market value of the start-ups. Remember earlier the investments coming into a start-up would have to be less than the fair market value of startup and this was a point of concern for start-ups as the criteria for evaluation was not clear so now that has been relaxed and any amount of money irrespective of the fair market value is now exempted from the tax. Other major developments have also been mentioned below
- For recognised startups requirement of ‘Merchant Banker Valuation’ has now been done away with.
- Approval of Inter-Ministerial Board is no longer required for claiming exemption u/s 56 (2) (viib)
- Department of Industrial Policy and Promotion will send the applications from startups for shares that have already been issued or for a proposed investment. that are seeking exemptions to the Central Board of Direct Taxes (CBDT) for approval which has to be provided or rejected within 45 days from receipt of application by CBDT.
- The notification maintains complete silence when it comes to addressing the entities regarding assessment orders that have been passed already. This leads to a demand rise as a result of Angel Tax. Obtaining instant recognition as a startup from the government and defending the case at the appellate stage seems to be the sole option for such companies.
- Bar on using Angel fund investments received for one entity, so if you got investment for one entity you cannot use it in another entity whether it’s subsidiary, group or holding of the same entity. Government’s prime motive was to prevent diversion of funds and generation of black money through complex entities. This bar has led to a sense of restlessness among start-ups.
- Pending notification from CBDT and IT department regarding changes in IT laws to make this notification more credible and enforceable.
About the Author
Sunil Kumar Gupta is an entrepreneur par excellence, philanthropist and a great visionary. He is the Leader of Indo European Business Forum (IEBF) and also the Founder Chairman of SARC & Associates, Chartered Accountants and SARC Foundation and Life Trustee of Rashtriya Antyodaya Sangh, a Public Charitable Trust. He has over 32 years of experience in diverse fields such as Corporate planning, Financing, Taxation, Banking, Education, Investments, Oil & Gas and in project implementations. He is a Fellow Member of the Institute of Chartered Accountants of India (ICAI), Life Member of Indian Council of Arbitration and Full Member of the Institute of Certified Public Accountants of Uganda (CPA-U).
The Goods and Service Tax (GST) was successfully implemented across the nation on July 1, 2017 with a lot of fanfare. It is a buzz word in India these days spanning across trade circles, financial pundits, and investment gurus. GST is the biggest tax reform in India’s 70-year history as an independent nation. It has replaced a complex net of existing taxes, bringing uniform tax rates and rules and simplifying compliance for businesses. It is a single, unified tax which justifies the adage ‘One Nation-One Tax’ and will have a very positive impact on Indian economy.
Impact of GST on Indian Economy
GST will bring about a uniformity in process and centralised registration that will make starting a business and expanding in different states across the India much simpler.
GST will ensure that interstate movement becomes cheaper and is less time consuming, by eliminating small border taxes and resolving check post issues.
GST also introduces an optional scheme called the composition scheme, which empowers small businesses with turnover between Rs. 20 lakh to Rs. 75 lakh to pay lower taxes.
In the near future, GST will enable financial inclusion in the economy.
Broader Tax Base and decrease in “Black” transactions.
Improved compliance and revenue collections
Automation of compliance procedures to reduce errors and increase efficiency.
GST will reduce tax evasion.
Cascading effect of tax on tax will be eliminated.
It will harmonise Central and State tax administrations
Make in India will get a huge boost as both tax and logistics cost will fall and lead to higher investments for the manufacturing industry.
Salient Features of GST
Destination-Based Consump-tion Tax: GST is a destination-based tax. This implies that all SGST collected will ordinarily accrue to the State where the consumer of the goods or services sold resides.
Dual GST: A dual GST with the Centre and States simultaneously levying it on a common tax base. The GST to be levied by the Centre on intra-State supply of goods and / or services would be called the Central GST (CGST) and that to be levied by the States would be called the State GST (SGST).
Computation of GST on the basis of invoice credit method: The liability under the GST will be invoice credit method, i.e. cenvat credit will be allowed on the basis of invoice issued by the suppliers.
Payment of GST: The CGST and SGST are to be paid to the accounts of the central and states, respectively.
Input Tax Credit: Input Tax Credit available on taxes paid on all procurements (except few specified items).
Technology based Assistance: GSTN and GST Suvidha Providers (GSPs) to provide technology based assistance.
The government is trying very hard to implement GST successfully for the benefit of the common man but there are certain oversights, loopholes, or shortcomings in entire gamut of GST implementation that become a hurdle in sectoral growth, synergised policy making and financial transparency, which the Modi government has been encouraging ever since it has come to power.
Even though simplified, GST still has certain complexities entwined in it. GST has an anti-profiteering provision empowering the Central Government to constitute, or appoint, an authority to monitor prices businesses charge for goods and services in the lead up to, and following the introduction of, the GST. This provision prevents entities from making excessive profits due to the GST.
But, there are no clear methods of assessing the GST benefits for purposes of passing it to the consumers. A GST anti-profiteering authority is also yet to be formed.
While, the reason behind such anti-profiteering measures is to protect the masses, the government should ensure that the entities will pass the tax savings from the seamless input credit to its consumers. For the successful implementation of GST and to attain its objective, the rules and methodology of anti-profiteering provisions need to be clearly stated.
In India, various developmental authorities/governmental authorities have been entrusted the function of urban planning. Urban planning is one of the functions enlisted in Article 243W and Schedule XII of the Constitution of India.
These authorities while discharging the function of urban planning, lease out the land for a period of 90 years or more for various planned uses like industrial, institutional, residential, commercial and mixed use.
The leasing of land for such a substantial period of time is akin to sale as per the provisions of Transfer of Immovable Property Act. As such the payment made for acquisition of land popularly termed as Land Premium, Salami, Cost of Land, is treated as capital payment which is subject to levies such as stamp duty, etc., on transfer.
IN the service tax era, there was no tax on such transactions as it was taken as similar to sale of land. But, while framing the GST provisions, it has not been considered that these transactions have been brought under the GST net. However, exemption has been provided for the Lease Premium/ Salami/cost of land received by the developmental authorities/governmental authorities for allotment of land for industrial purposes.
There is no logic why land being allotted for purposes other than industrial purposes has been kept out of exemption list, while in current scenario, almost all lands being allotted by development / governmental Authorities are on a lease of 90 years or more
Land has always been kept out of the meaning of goods and service, but by taxing the Lease Premium/ Salami/cost of land, the basic concept of levy of GST has been missed.
Under the GST, where Central and State-level taxes have been merged and a provision has been put that any manufacturer with a turnover of Rs. 20 lakh (Others)/10 lakh (Special Category States) or more has to comply with GST norms related to excise duty, which earlier were exempt up to turnover less than Rs. 1.5 crore will serve as a dampener for many MSMEs. For an MSME, a lot of self-effort is utilised is staying in business by running business in a most cost effective way. Now, they will have to spend resources – time, money, and manpower – on fulfilling the GST obligations.
This can have negative impact on compliance for GST.
GST implementation has a high compliance cost to MSMEs. The single window tax regime intended to simplify processes under GST is facing many challenges in its interpretation and implementation. To reduce the GST compliance burden on MSMEs, the Government has to provide all GST compliance utilities on the GST portal. So that MSMEs can accomplish all the compliances without any hassle and any professional support.
In conclusion, I would like to state that GST is a welcome change for the Indian economy. It is bound to reap fruits of profit for India in the long term. However, while drafting the GST bill and categorising the items, there have been multiple oversights which will have adverse to negative impact on the common man of India, certain sectors and the economy at large. The government and the GST Council have not closed their doors for suggestions or observations. They have promised the country to revisit the rules and rates periodically till all the dust settles down. We need to be patient and let the financial experts do their work, however, if we need to share anything then we should be duty bound to bring it to their notice. I am very sure that with time GST will become the strongest backbone of the economy and will help Indian economy to walk miles into bliss.
The writer is an author, economist and philanthropist. He can be contacted at www.sunilkummargupta.com
Technology has really shaped up the mindset of professionals from all walks of life and its utilization has given a holistic understanding in order to pester the needs of working professionals. Now this revolutionary change applies to people in accounting industry as well.
We are in an era where without the use of technology, we can easily be ostracized and this cobwebbed situation especially in our working atmosphere can pull us out of business. Even if you’re an aspiring accountant or you’ve been a CPA for decades, you may not think much of your preferred accounting system. If you are dedicated in the field of accounting or currently pursuing a bachelor’s degree in accounting, then it is important that you must be up to date on the kind of technology being used in your professional workspace.
Let’s take a look at some of the most important accounting technologies that can help accountants to approach their workspace through an effective and efficient lens:
Cloud computing plays pivotal role as one of the efficient technologies within the accounting sector. According to Forbes, worldwide spending on cloud services will grow radically.
This paradigm shift for professionals following traditional accounting pattern has given them a technology that is used for storage and accessibility of data online rather than on your hard drive.
Blockchain technology is the distribution and decentralization of database technology. It can protect encrypted data and sustain an expanding list of transaction between all parties of those transaction.
This accounting technology will assist many financial advisors in Delhi to bring a qualitative change in the financial industry.
This type of technology eases human effort and does most of the job for you. Automated is an efficient tech that will make virtual controllers of automated accounting high in demand.
This lucrative technology will be able to redefine the role of an accountant and bring quantifiable results for the same.
Optical Character Recognition
Optical Character recognition is a new technology in the market that electrically converts images and handwritten texts or printed text into machine encoded text.
OCR is finding an elbow room in automated, cloud based applications. These technological trends create a powerhouse for business experts within the accounting software