THE GIST of Editorial for UPSC Exams : 06 FEBRUARY 2019 (Timely review: On start-up tax (The Hindu))

Timely review: On start-up tax (The Hindu)

Mains Paper 3: Economy
Prelims level: Angel Tax
Mains level: Taxations problems and procedures

Context

•  Start-ups troubled by the so-called angel tax may soon receive some concession from the government.
•  The tax, which was first introduced in 2012 to curb money-laundering through the sale of shares of private unlisted companies at bloated prices, has caused a lot of anguish among start-up investors in the country.
•  Start-up owners have complained that income tax officials have asked many start-ups to cough up money when they try to attract capital into their entities by issuing new shares.
  Existing tax base system
•  The IT department fears that start-ups may be used as convenient tools to launder illegally acquired money, so a tax on investments beyond a certain threshold is necessary to deter such shady operations.
•  But while the intent of such an angel tax may be justifiable, the arbitrary nature of it means the cost of unintended consequences could be larger than the supposed benefits.
•  In trying to curb money-laundering, Section 56(2)(viib) of the Indian Income Tax Act, 1961 gives income tax officials a free hand to harass even genuine start-ups looking to raise investments for their growth.
•  Under the Act, the IT department is free to arbitrarily decide the fair value of a company’s share and tax start-ups if the price at which their new shares are sold to investors is higher than the fair value of these shares.
•  The broad-brush tax on all investments means an unnecessary cost is imposed on the wider start-up community simply because of the lack of better means at the government’s disposal to tackle black money.

Key suggestions made by the committee

•  The committee set up by the government will, among other things, consider raising the threshold beyond which new investments into start-ups will be taxed.
•  It is expected that start-ups with aggregate paid-up share capital and share premium of less than ₹25 crore, against the previous threshold of only ₹10 crore, will not be taxed while attracting new investment.

Way forward

•  This would definitely make life easier to a certain extent for angel investors and start-ups.
•  But it will not address the real problem with the angel tax, which has to do with the unbridled power that it vests in the hands of the income tax authorities.
•  Investors, foreign or domestic, may become wary of investing in new ideas when they are taxed while risking money on untested ventures. So the government should look to withdraw the angel tax and focus instead on building the capability to better identify and rein in illegal wealth.
•  Otherwise it risks killing the nascent start-up ecosystem in the country.

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General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q1. Consider the following about Power Finance Corporation.

1. It is a non-Banking Financial Company (NBFC).
2. It is a Navratna Central Public Sector Entreprise (CPSE) in the Financial Services Sector.
3. Its majority shares are held by the private sector.

Select the correct answer using the codes below.

a) 1 and 2 only
b) 2 only
c) 1 only
d) 1, 2 and 3

Answer: A

Mains Questions:
Q.1) What is angel tax? Why the idea of an ‘angel tax’ on start-ups must be reconsidered?