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The change
The Budget has announced some changes that would stimulate growth among start-ups. The main relief was on the Angel Tax front.
Investors can now breathe easy as the taxman will no longer question the share premiums attributed to valuations. The I-T department will resolve the pending assessments related to Angel Tax through a special arrangement, and the assessing officer cannot enquire into such cases without approval from a supervisor.
There will also be an e-verification mechanism to identify start-up investors. As far as freedom from income tax scrutiny is concerned, there won’t be any difference in dealing with valuation of shares issued to private equity funds and valuation of shares issued to venture capital funds. The Budget has extended the time-limit to avail an exemption from the capital gains tax arising from the sale of a house, the proceeds of which are invested in a start-up, to March 31, 2021.
Background
The Modi government launched ‘Startup India’ in FY15 to promote start-ups by simplifying processes and extend financial assistance, and to create an atmosphere of greater industry-academia participation. A ₹10,000-crore start-up fund under the Ministry of Commerce and Industry was set up. It invested in various alternative funds, with a plan to infuse the full budgeted amount by 2025. At the end of FY19, the fund has invested only about ₹2,265.7 crore.
In the past few years, the I-T Department’s exuberant pursuit of tax revenue from Angel and seed-round investments — which was eventually called the ‘Angel Tax’ — dented investments in start-ups.
The funding for early-stage start-ups fell to $139 million in FY19 compared to $166 million in FY18. The number of deals related to early stage start-ups also dried up in FY19. However, late-stage ventures like Swiggy and Oyo Rooms have been getting funding crossing $1 billion in valuation.
Verdict
The government has made a last-ditch attempt to put to bed the ghost of Angel Tax that had scared investors away from investing in start-ups. Immunity has been given to investors from income tax scrutiny through a e-verification mechanism. It remains to be seen whether this ‘mechanism’ serves its purpose or turns into another tool of harassment by the I-T department.
(The writer is an intern)
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