The Taxman cannot solve Angel Tax

It has only been a week since I wrote a post on the need to change the investment narrative in India and just 3 days after that, I received a slew of notices from the income tax department asking for ludicrous details on the investments made by Artha India Ventures. Furthermore, a couple of our founders warned us that more notices were on their way since they had gotten them too. This witch hunt is nothing but a death knell for angel investors. Former-IAS Venkatesh Shukla said it best “civil services officers were the “worst” people to decide policies for start-ups.

In one of the notices that we received, we were asked for proof for 20+ points that included literally everything but my medical records (although I should submit them too, just in case). One of the items of the information sought included personal bank account statements of the director of the entity that we had invested through. Since the current directors are all family members, getting this information was not a problem, but can you imagine the embarrassment we would have had to face if we had prominent people as our independent directors? To sum it up, the evidence being sought is nothing but a ruse in forcing us to settle with the officer.

I would love to challenge this harassment in a court of law, but our legal system is already creaking under the weight of crores of cases, adding another one would hardly serve any purpose. The Prime Minister and the Finance Minister need to be cognizant of the difficulties of doing business in India as well as raising seed and angel funding for Indian start-ups. Such fact-finding missions will certainly drive away the much-needed financial support for the start-up industry in India.

Thankfully these notices (as of now) are not being sent to VC/PE funds, so the investors putting in money through funds are safe from this kind of harassment. However, I do continue to believe that we require a robust angel investment ecosystem to start producing 3,000-4,000 seed funded start-ups that will expand out of India by 2030. One of the solutions would be SEBI or a competent authority providing accreditation to certain individuals/entities to be angel investors, a topic I have been discussing on various forums for the past 2-3 years.

This accreditation would put an angel investor on par with VC/PE funds that are allowed to assess the risks of investing in unlisted companies and decide the value they are willing to pay to buy a stake in them. Start-ups that would raise money from accredited investors would only be required to submit the investor’s accreditation certificates (which SEBI can also list on their website) to the income tax officer during the enquiry. If any of the investors on the list do not have accreditation, it would open the start-up and that whole round’s investors to income tax enquiries. The message would be loud and clear i.e. no accreditation is equal to IT investigation. Therefore, this would form a self-policing system wherein start-ups would avoid raising money from non-accredited investors and investors would not like to invest alongside non-accredited investors, thereby pushing every angel investor to get themselves accredited.

The PMO and FMO offices need to step in to stop the mess being created by the income tax department’s officers, from spreading further, or (I shudder to say) we will be an India of 1990 and not 2020.

98/2018

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4 thoughts on “The Taxman cannot solve Angel Tax

  1. Namaste Anirudha,
    Rightly pen down what is going in our mind as an entrepreneur as we have received notice from IT on the similar line.We are busy in putting everything in place to make positive impact in agribusiness domain.But saddened by the notice although we are woking on it’s reply.

    As this is very new and suprising for us, request you if you can help us in anyway may be connecting to the right people.Although we have engaged CA known to us.

    Thanks and appreciate you to bring up this issue in the public domain.

    1. Dear Maruti.. since you have engaged a CA you should be in good hands. We can suggest our CA to you if need be. Just let me know if I can connect you via email with him.

  2. Why cant 20 angels create AIF Category 3 and invest 1 crore each and invest via that ? Isnt AIF3 an accredited vehicle ? So why do you think a seperate one is needed ? Why is AIF3 not a good idea ?

    1. An AIF requires much more than 20 people putting in a crore each.. there is a cost to this structure and a cost to maintain it and it takes away (in most cases) the optionality that an angel investor has in what deals he/she does or does not want to participate in.

      A proper accreditation process would be a better option.

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