The entrepreneurial class and the venture capital industry alike are understandably disappointed that the Government has yet again let slip the opportunity of the presentation of the Union Budget (2018) to do away with a piece of taxation that they regard as regressive.
What is ‘Angel Tax’?
The ‘angel tax’ is the tax on share premium paid to acquire new shares in a company that the tax authorities regard as excessive.
What is the issue?
A tax on invested capital is against all accepted notions of what constitutes a tax on income. Critics argue that there is a risk of choking off of some badly needed incremental investment in a startup enterprise.
Government response –
The Government has modified the law to some extent to soften its impact. But these are more in the nature of some legal exercises when the substantive point of a tax on invested capital first introduced into the tax code with Budget 2012 remains very much in place.
Why it was introduced?
At the time it was introduced in 2012 the general public was convinced that the entire administrative machinery of the Government was steeped in corruption. There was the case of an associate company of the beneficiary of 2G spectrum allotment subscribing to the shares at a huge premium in a company that clearly had links to a party that was a member of the ruling United Progressive Alliance at the Centre.
What were the options?
- It is harder to establish criminality on the part of the minister responsible for allotting 2G radio spectrum within the framework of established principles of jurisprudence applicable to such cases.
- Government stoutly defended the ministerial actions as driven solely by considerations of public interest, which of course it did since exemplified by the famous ‘zero loss’ theory. It was therefore, become necessary to be seen as penalising the recipient of some largesse that had accidentally materialised from an administrative decision.
- The ‘angel tax’ has to be seen in this perspective. Thus it has become difficult for the Congress party to lead the charge for its abolition after having been responsible for its introduction. Equally, the BJP sees a roll-back of this tax provision as fraught with avoidable political risks.
What can be done now?
As it happens, it is possible to design a system around the provisions of an ‘angel tax’ regime in which –
- Excess share premium will be recognised as income.
- The resultant figure of tax will be merely recognised as a deferred tax liability in the books of the enterprise.
- The outstanding tax obligation may be permitted to be liquidated against actual fixed capital expenditure or incremental working capital needs through suitable accounting entries i.e. provision for deductions or set-offs.
The larger point is this. It is possible to bring about tax reforms within the constraints of the political compulsions of those tasked with ushering in such changes. They just need to be shown a way around it.