Indian Startup Community Fumes After Tax Dept Forcibly Withdraws Angel Tax From Bank Accounts

Matters appearing to be coming to a head in the tussle between the IT department and India’s angel-funded startups.

The IT department has begun deducting angel tax straight from startups’ bank accounts, several startups have reported. Noida-based startup TravelKhana, which had been slapped with a Rs. 2.3 crore tax notice in December, has had its bank accounts frozen, and the existing balance of Rs. 33 lakh taken away by the tax authorities. BabyGoGo, another startup, had its account balance stand at negative 72 lakh after the tax authorities deducted Rs. 72 lakh from its account as tax. 

 

India’s startup community has been up in arms over the notices that it had been receiving around angel tax, but this might be the first time that the tax department has cracked down on startups. Over the last year, tax authorities have become increasingly diligent about angel tax, which is calculated on the angel investment a company receives over and above its fair value. Since startups have little fair value when they start off, having no product or proprietary technology to show for, startups end up having to pay a 30% tax on any initial investment they receive.

Startups had criticized the imposition of this tax, which they say hurts entrepreneurship and innovation. But the true impact of the tax is only being felt once the tax authorities have begun cracking down on defaulters — TastyKhana says it has no money to run its operations or pay its team of 70 employees after the tax authorities deducted Rs. 33 lakh from its account.  Founder Pushpinder Singh said that the taxmen didn’t “look at the fact that we are a start-up, we are someone who are known in the field. They just acted assuming that we are criminals, who are into money laundering.”

Apart from startups, some angel investors are fuming too. Rajesh Sawhney, who’s founded InnerChef and Healthie, and is an angel investor in companies like Instalively, NightStay, and Quizizz, says he won’t be angel investing any more until the issue is resolved. “I am suspending all angel investing till the time Angel Tax is abolished,” he tweeted. Fellow angel investor K Ganesh said that the angel tax was destroying genuine entrepreneurship.

Anonymous twitter account Unicon Baba, who tweets inside information about Indian startups, has been trying to start a campaign for the angel tax to be abolished.

 

It remains to be seen if the pressure will pay off, but the Indian government in the past had assured startups that it was aware of their grievances. In December, Minister of Commerce and Industry Suresh Prabhu had personally tweeted that he was looking into the issue. But with tax authorities now cracking down on startups with even greater vigour, it’s unclear if the government has taken a stand in favour of the entrepreneurs. If the angel tax remains, going by the reactions of both angel investors and entrepreneurs, it could seriously hurt the fledgling startup culture that India’s managed to build over the last few years.

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