Drop the angel tax: Stop taxing startup investments as income
₹1 lakh of paid-up capital at ₹1 per share, with an average pre-money valuation of ₹10 crore now would result in an issue price of ₹1,000 per share, or a premium of ₹999. But this would likely result in angel-tax notice from authorities. The tax department uses a system known as Computer-Aided Selection of Cases For Scrutiny (CASS).
As the department states: “CASS is a system-based method for scrutiny selection which identifies cases through data-analytics and three-hundred sixty-degree data profiling of taxpayers and in a non-discretionary manner." An analysis of various companies that received such notices would suggest that the criteria employed for angel tax include the question of whether a loss-making business issued shares at a premium. Early-stage losses are the norm for startups, not an exception. They invest heavily in teams, their product-market fit, marketing, etc, in the early years, faced as they are by intense competition, often from entrenched players.
Getting a business started incurs high costs much in advance of revenues, with the expectation that these will rise and costs will stabilize or flatten over time. Such losses do not indicate lack of value creation, as they are investments in a revenue ramp-up over time. Its core issue: The practice of assessing officers comparing startup projections in its valuation report with actual performance, with no regard for a valuation report in case of deviations, is problematic.
As forecasts, projections are subject to execution risk. Even India’s budget sees adjustments. New businesses operate under more uncertainty, and the equity risk taken by investors covers it.
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