Exorcise the devil in angel tax garb

Exorcise the devil in angel tax garb

With GAAR in place, why have this tax at all?

The government sets great store by startups, to tackle India’s problem of unemployment. Startup India is a major programme. Or is it merely a campaign? Instead of tinkering with the angel tax, as the government has, it should simply scrap the tax. Unlisted companies were issuing shares at fancy premia and absorbing large amounts of capital, which they were free to spend as they please, say, granting unsecured loans that eventually get written off. To prevent this route being used to convert black money into white, the government introduced a tax in 2012: 30% of the capital received in excess of what the taxman assesses to be the fair value of the company. This has become a major hindrance to angel and venture capital flowing to startups. Instead of fuelling entrepreneurship, a good proportion of the capital would go as tax.

Now comes a concession: startups that receive up to ₹10 crore would be exempt from the tax, provided they get a certificate from an inter-ministerial board of certification. This does not improve ease of doing business — it merely creates hurdles in the path of entrepreneurship and rent-seeking opportunities for middlemen who obtain the needed certification. This is absurd. The cap of ₹10 crore for exemption from angel tax is arbitrary. Startups that want a certificate also have to get a report from a merchant banker specifying the fair market value of shares. Imputing a fair market value to a startup is tough, given that they barely have any revenues or profits and less-than-certain futures.

In 2012, it was not easy to establish the identity of those buying shares at inflated prices. Today, Aadhaar-linked bank accounts and the General Anti-Avoidance Rules are at the disposal of the tax authorities to establish if the investment has been made from tax-compliant sources or not. The government can also track down fraudulent shell companies and their promoters, if it insists on declaration of beneficial ownership and institutes a unique legal identifier system for all persons and legal entities, which include companies, charities and trusts.