Budget plan to tax funding irks

Start-up circles in the country are in a rage. “This Budget will kill entrepreneurship,” says an irate Mr Raman Roy, Chairman and Founder, Quattro, and one of the pioneers of the business process outsourcing sector here.

30% tax

A Budget proposal in the Direct Taxes (Clause 21) has got him — and a whole bunch of entrepreneurs and angel investors — worked up. According to the clause, an investment received by the entrepreneur from a private funding source may be deemed as income and 30 per cent of the amount taxed.

Mr Saurabh Srivastava, co-founder of Indian Angel Network, explains: “An angel investor may invest Rs 1 crore in a company that has no revenues and no profits and the tax official, unless otherwise ‘persuaded', would tax the company at 30 per cent for no reason at all and convert an investment into income.”

The intention on the part of the Finance Ministry, according to tax experts, may have been noble.

Even Mr Roy admits as much, “Often, not-so-good money goes into private limited companies.” The contentious new clause, which comes into effect from April 1, 2012, will apply if “…a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares.”

In other words, if for a Rs 10 face value share in the company, the investor pays Rs 100, the tax official will come sniffing. Typically, angel investors do invest in this fashion.

Mr Roy says, “We are approaching various venture capital associations and together will make a representation on this to the Finance Ministry.” He says it has taken IAN five years of hard work to motivate high-net-worth individuals to start investing in start-ups. “We are now 150-odd angel investors investing in 10-12 deals a year. But after this angel investment is going to be a still-born baby,” he says, as valuations will go haywire.

Mr Mohit Bhakuni, founder of two-and-a-half year old start-up Contify.com, which is into content aggregation and distribution, says he was looking for funding in order to scale up.

Could hinder fund flow

“We are currently 85 people strong but need to scale up to 500 people in two years,” he says, but worries that the clause will now hinder his fund seeking. “As it is, generating funds is very difficult in India as our angel investment system is not totally evolved. Now if the Government puts such disincentives, then what will entrepreneurs like me do,” he questions.

“Various measures enunciated for SMEs will come to naught because of this one clause. This is because angel investment precedes venture capital investment. For VCs to fund 10 companies we need 1,000 entrepreneurs to be funded by angels,” says Mr Srivastava.

The Budget had announced the setting up of a Rs 5,000-crore India Opportunities Venture Fund with SIDBI.

Chitra.n@thehindu.co.in

(This article was published in the Business Line print edition dated March 18, 2012)
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