Startups, angel investors want clarity on investing in subsidiaries, mutual funds

Indian entreprenereurs and angel investors want the government to allow startups to invest in a bunch of areas they think are critical to business without running afoul of the revised angel tax norms, according to people involved in the deliberations.

The government had eased the norms for levying angel tax last month but also added a number of riders that startups and investors say make it difficult for them to benefit from the relaxation. For instance, the norms bar startups from investing in shares and securities, including mutual funds, as well as in subsidiaries or associate firms. 

Since then, however, the Department for Promotion of Industry and Internal Trade (DPIIT) has held discussions with a group of startups and angel investors to provide further relief.

“We are being heard by multiple government bodies.The aim is to ensure that startups which match the definition of shell companies are screened,” said Sunil Goyal, managing director at early-stage venture fund YourNest Venture Capital.

Since the February notification, the department has held follow-up meetings on March 7 and March 20 with industry bodies such as the India Private Equity and Venture Capital Association (IVCA) and startups for their recommendations on providing automatic exemptions from angel tax as well as other relevant changes in policy.

As part of the discussions, the startups have sought clarity on the restriction on investing in equity and securities, said Goyal, who is a part of the discussions. 

The notification also bars startups seeking exemptions from making ‘contributions’ to any entity, including subsidiaries. This makes it especially difficult for fintech lenders, create separate subsidiaries for their technology and lending operations. Subsidiaries are also essential for companies looking to expand overseas where they might have to register a company in accordance with the law of the land.
“The industry representatives will be sharing recommendations to carve out genuine use of funds by a startup for automatic exemption from the angel tax. These include giving loans and advance for trade, rentals, government dues and performance guarantees,” said Goyal. 

Goyal also said a startup should be allowed to make investments in equity of their overseas subsidiaries or make acquisitions of business ventures or incorporate subsidiaries for regulatory reasons. He added that these issues are likely to be resolved soon. 

The discussions on angel tax took centre stage in December when the Central Bureau of Direct Taxes (CBDT) slapped notices on 128 startups under Section 56 (2) (viib) of the Income-Tax Act which taxes ‘income from other sources’, including capital raised from angel investors, at 30%. Around 90 startups received exemption from the CBDT on March 21 as a result of the February notification, which requires companies to register with the DPIIT as a startup and seek exemption.