After Entrepreneurs Complain On Social Media, Govt. Decides It’ll Look Into Controversial Angel Tax

India’s startup community might not be the biggest in the world, but if it speaks together it can get its voice heard.

The Indian government has said that it will look into the matter of angel taxes that’s been raised by the Indian startup ecosystem over the last few months. “We have taken up the matter,” tweeted Minister of Commerce and Industry Suresh Prabhu.

India’s startup ecosystem has been up in arms over recent notices received by several founders over the angel investments into their startups. Several founders have received letters levying penalty on the tax not paid, and in some cases, the taxes-cum-penalty amount is as much as half of the total amount raised. “If they ask us to pay almost Rs 45-50 lakh as tax on investment of Rs. 1 crore, who will put money in a startup?” a startup founder told TOI.

The tax on angel investments was first introduced in 2012, but is being implemented in force only in the recent past. The main bone of contention around the tax is the fair value of a startup — regulations state that any amount raised by a startup above its fair value needs to be taxed at 30%. Now fair values of startups are hard to determine — it’s not uncommon for teams of 2-3 with a minimum viable product to raise crores of rupees. With the product being untested, the company having no revenue, and the business still being unproven, tax authorities often place a very low valuation on these companies. This means that startups must pay a tax on the difference in valuation their investors provide them versus their valuation determined by the government.

Several prominent voices in the Indian startup ecosystem had spoken against this tax.  “Draconian angel tax torturing startups. It is killing genuine innovation,” former Infosys CFO Mohandas Pai had tweeted, who himself is an active angel investor.

Snapdeal founder Kunal Bahl had been more blunt, saying the tax was destroying the most promising startup community in the world.

Former VC at 500 Startups Pankaj Jain had said that investors globally were pleading with India to fix the situation.

Even Anand Mahindra said that the tax went against all the tenets of Startup India, the scheme had been promoted by the Modi government to encourage entrepreneurship in the country.

The pressure, for now, appears to have paid off. With Union Minister Suresh Prabhu tweeting that he’d look into the matter, it’s likely that entrepreneurs will get some relief from the tax notices they’ve been receiving. Entrepreneurship by itself is hard enough — founders don’t need to worry about an additional 30% tax when they’re starting off building their companies.