Budget 2020

Centre may look at new framework for angel funds for start-ups

Sangeetha Chengappa K. Giriprakash Bengaluru | Updated on February 02, 2018 Published on February 02, 2018

The Budget lacked clarity on angel tax, tax holiday status, ESOP taxation laws, say industry insiders

In his Budget speech on Thursday, Finance Minister Arun Jaitley was expected to announce a separate policy on angel and venture investments in start-ups, one of the biggest bones of contention for entrepreneurs, who currently have to pay as much as 30 per cent tax on funding even if their companies have not earned any profits. The government has categorised these fundings as earnings.

Ray of hope

The Finance Minister made a passing reference while presenting the Budget, to issues regarding taxation on angel investment. While many start-ups are disappointed about no concrete announcements addressing pressing issues, they say there is a ray of hope as the government may not have announced any sops because it wants to look at revenue implications following several schemes announced for the rural sector.

Mandar Gadkari, Head of Investor Engagement, Cross Border Angels, told BusinessLine that while the Budget was a bit of a disappointment with regard to taxation on angel funds, the Centre may eventually come out with a taxation structure for these funds. Jaitley did make a passing reference on taxation, regulatory framework and policies for angel and venture investments. Therefore, the government is aware of it, he pointed out.

‘Not so simple’

Gadkari said the Centre is probably looking at the revenue implications of all the sops it has given so far. Once there is clarity on it, it will take up issues about venture and angel investments. “It is not that simple at all. There has to be first a policy on money laundering because such investments are prone to misuse. There has to be a slab-based tax. If you earn, only then you need to pay. But if you are not making profits and still get money from outside investors, then you need not be taxed,” he said.

The angel tax has to be either linked to revenues or profits. So probably the government knows it is not that easy and they need to put some thought into it, he said.

“The government has taken many steps in the past couple of years to improve the on-ground execution of the Start-up India programme, such as easing the certification process to claim benefits and also providing seamless access to funds and mentorship,” said Ankit Garg, founder CEO, Wakefit.co, an online mattress seller. “However, clarification on tax holiday status of three years based on the date of incorporation of the start-up, ESOP (employee stock ownership plan) taxation laws and the angel tax norms, would have definitely given a strong fillip to the start-up ecosystem and contributed to the ease-of-doing-business index that the Prime Minister is so passionate about improving.”

Elaborating, he said, instead of the tax holiday kicking off from the day a start-up is incorporated, income tax should be applicable from when the start-up starts generating revenues. Second, in the US, employees who receive ESOPs only pay tax when they sell it. However, in India, employees are required to pay tax on the value attached to the ESOPs when they receive it. Lastly, some clarification on the angel tax, which is a huge burden, would have helped.

No specifics

Rohan Bhargava, co-founder of cashback and coupons site CashKaro.com, felt the Budget lacked specific initiatives to directly boost start-ups and corporates. “We were hoping to see more details on simplification of tax structures, allocation of Start-up India Fund, dissolution of angel tax, extending of the tax holiday period. But many such topics were completely left out in the Budget and perhaps may be addressed in the Annexure,” he said.

The proposal to extend the 25 per cent corporate tax rate to MSMEs with a turnover of up to ₹250 crore (earlier ₹50 crore) that are in dire need of support, and the promise to revamp the online loan sanctioning facility for MSMEs are encouraging, Bhargava added.

Sunil K Goyal, MD and Fund Manager, YourNest Venture Capital, gave a thumbs up to the long-term capital gains on listed securities and the dividend tax on equity mutual funds. “With this move, the Budget has neutralised the unfair tax regime of zero tax on long-term capital gains on listed equities vs any other asset class such as venture capital, real estate, start-ups, debt funds, etc. We admire the appreciation by the Finance Ministry on the role played by venture capital funds and angel investors. The step will bring much required investments into Indian start-ups, which were not as attractive as investments in listed securities and equity mutual funds because of the 30 per cent angel tax. The FM has recognised the importance of the positive work that angel investors and VC funds are doing for the economy, and is considering additional measures to strengthen the environment for their growth.”

Encouraging investors

Stating that the Centre must consider emulating the UK and Singapore models to encourage start-ups, Rajeev Banduni, co-founder and CEO, GrowthEnabler, said that in the UK, under the Seed Enterprise Investment Scheme, investors can invest up to £150,000 in start-ups and receive a 50 per cent rebate on income tax and can invest up to £1 million in start-ups under the Enterprise Investment Scheme and receive a rebate of 30 per cent on income tax, As a result, rich people who would otherwise invest in other asset classes such as real estate, equities etc, are encouraged to invest their surplus money in start-ups.

Start-ups, SMBs and the service sectors are the largest employers today and not large corporates who are seeking greater efficiency through automation and laying off people, he added.

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Published on February 02, 2018
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