Complication in Angel Tax: New startups may look to register in other countries.
18th, February 2019 - Startup community
India’s top entrepreneurs and investors fear that the issue of angel tax, along with some unfriendly e-commerce policy changes, may push new startups to register overseas, especially in the US and Singapore, besides impacting funding for new companies
The threat of foreign incorporation comes even as the rechristened DPIIT (department for promotion of industry and internal trade) and CBDT are expected to finalise measures this week to resolve the tax issue. At least 120 startups have got orders to make tax payments on the valuation premium in the investment received for expanding their business.
As per the source several early-stage investors have started seeing a movement of startups to overseas jurisdictions though concrete numbers on the impact of angel tax are yet to be seen. Some of the investors feel 20-40% of startups would have been incorporated in the US or Singapore, besides other foreign jurisdictions, over the last 12 months due to regulations in India, including angel tax. This number may increase as these countries have most favoured policies for startups in terms of tax and infrastructures.
The impact of angel tax, which surfaced in 2016, has also been felt on early-stage investments. The number of seed and angel deals has more than halved from 1,030 in 2016 to 484 in 2018, according to Tracxn. One of the major reasons for the fall in transactions is angel tax, apart from a drop in new startups, during the period.
The fear of harassment from tax authorities is leading prominent entrepreneur-investors to rethink their plans. This may even cause in terms of less investment or shift in the market for investment as well.
The tax department is not disclosing how many of them have been sent notices or tax orders. As a group, they have submitted a list of 120 startups to the tax department and DPIIT. The actual number of startups that have been affected would be much bigger.
If this situation continues then India may lack of innovation and entrepreneurial activities. GoI should intervene and take the situation into control. This step will help to nurture the ecosystem in India.
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