Angel tax: Startups await clarity on 'missed targets'

New Delhi, May 29, 2023

The government's draft rules for valuing non-resident investments into unlisted startups have comforted the industry as they provide clarity on angel tax, but the big question that remains is how the deviations of performance versus projections be handled by the income tax authorities.

\Any valuation report is contingent on continuity of business lines and meeting projections. These are probabilistic and contingent on numerous factors. Even listed companies see changes in their price with each transaction and targets being missed. The industry would welcome clarity on how the tax officers will view such changes. An SOP (standard operating procedure) would add clarity and ensure that legitimate capital is not prejudiced due to normal business changes," said Siddarth Pai, founding partner at 3one4 Capital.

In a blog published in February, Pai had explained how startups, which raised capital would get notices, asking them to justify their valuations against actual performance. Startups facing angel tax notices have to pay 25% of the investment raised as tax and twice that as penalty for violating the exemption conditions.

"Though, this notification is a welcome move since the multiple choice of methods will give the startups a choice to negotiate with the investor at a better price....but it is a hope that unlike in the past years, where the income tax authorities have brazenly challenged the valuation report even though it was according to laid down provisions, such should not be the fate in the amended provisions," said Saurrav Sood, international tax and transfer pricing practice leader at SW India, an advisory firm.

[The Times of India]