“Govt must not look at angel tax as just another source of income from businesses”

Angel tax has been buzzing in the startup arena of late. More than 2,000 startups have been handed over angel tax notices, according to Indian Private Equity and Venture Capital Association, a grouping of investors.

In an interview with ETCFO, Satish Kottakota, Chief Financial Officer at a Hyderabad-based startup CallHealth Services discusses his perspective on angel tax and shares his expectations from the regulators going forward.

CallHealth was founded in 2013, and is an integrated health care platform.

Angel tax deals with the premiums paid by investors while they invest in startups. It was brought in 2012 to check laundering of funds. It has come to be called angel tax since it largely impacts angel investments in startups. Edited excerpts:

Q: What are your broad views on angel tax? What are the pain points? 

Satish Kottakota: It is unfortunate many startups of late have been handed over angel tax notices. The government should clearly differentiate between startups and shell companies. Honest and compliant businesses shouldn’t pay the price. 

Also, such treatment by the tax authorities does not seem to send a good signal for doing business in India. It affects capital raising plans of the startups and dampens the spirit of the investor community. 

Q: How should the government go about addressing the concern over taxing startups? 

Satish Kottakota: The tax department can look at the spending patterns of the businesses more comprehensively before actually sending tax notices. Typically, a genuine start-up would spend money on its technology platform, or for marketing itself or handing salary to its employees, or in increasing customer base for growth.

Further, it will have a decent and credible investor base. The investor profile is submitted to Register of Companies (RoC) as a part of compliance and tax authorities have always access to these documents. In case of any doubt, they can also seek clarification at any given time from the businesses. 

Simply, if the basic checks and balances are carried through, there won’t be any need for sending tax notices in about 90 per cent of the overall cases. In the rest 10 per cent, the government can always undertake strict actions as stipulated under the law. 

Q: There are reports that the government might raise the tax break-up limit on investments to Rs 25 crore from the current Rs 10 crore. Do you think this is a decent balancing act by the regulator? 

Satish Kottakota: This step would be appreciated but would not be enough for tackling the larger issue. This is because the valuation for startups is normally way high in markets. This small relief being thought of right now wouldn’t be able to exorcise the angel tax demons completely. 

Q: Going forward, what are your expectations from the government? 

Satish Kottakota: The government should focus more on finding out the non- compliant businesses. They should undertake more efforts in that direction. Honest and truly governed startups should not feel the pain. At the end of the day, the government should not look at this channel as just another source of income from businesses at large.