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Angel tax fears make startups wary of M&As

Startups hoping for relief from angel tax on capital investment see their merger and acquisition (M&A) plans going for a toss after the latest conditions for immunity, laid out once startups get registered with the Department of Industrial Policy and Promotion (DIPP).

One condition, however, is that startups must not invest in any shares or securities, hampering M&As, industry trackers said.

Tax experts said if startups opt for M&As, they would most definitely face angel tax scrutiny. "As per the conditions, if startups acquire another company or a stake, they lose immunity from angel tax," said Amit Maheshwari, a partner at Ashok Maheshwary & Associates.

Tax officials question the premium paid by investors in startups at valuations that continued to increase even as revenues slipped or stayed stagnant. The revenue department deems capital in excess of fair market value as other income that's taxable. In cases where the investor is not Indian, the tax department had, in the past, issued notices branding such investments as "unexplained cash credits" and charging 30% tax on them.

"It's a Hobson's choice but for startups, the only motto is growth; they will choose growth strategy over immunity," said Sushanto Mitra, founder and chief executive, Lead Angels.

Industry observers said many startups tend to have M&A strategy for growth. In several cases, some investors tend to merge some of their portfolio companies for better impact.

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