From the Viewsroom

Making start-ups ‘atmanirbhar’

Vivek Ananth | Updated on July 23, 2020

India’s entrepreneurs should be freed from painful taxation rules

The Prime Minister’s call for an ‘Atmanirbhar Bharat’ to drive India out of the economic slowdown is laudable. The hope is that it will help India get out of the looming recession. Start-ups have a big role to play in this campaign, but is the Centre doing enough to make them ‘atmanirbhar’?

There are two niggling issues start-ups face — Angel Tax and taxation of equity stock options. Angel Tax is charged on start-ups who raised funds through equity shares on higher valuations despite continuing to make heavy losses. For companies that are currently in dire straits because of the pandemic, this is a double whammy because of scarcity of capital.

The provision for Angel Tax was meant to plug illicit funds coming into shell companies. In times of capital scarcity, the Centre should put in place common sense rules and regulations. Now would be the right time to unshackle India’s Angel investors. But in the recent past, the Income Tax Department forcefully adjusted refunds against its pending Angel Tax demands. Although this is legal, the department had previously assured that it will not take such coercive actions.

To get exemption from Angel Tax, entrepreneurs have to go through a screening process by a panel of the Ministry of Commerce and Industry’s Department for Promotion of Industry and Internal Trade. Only if the business is innovative enough will the start-up or its investor be eligible for exemption.

The end-use restrictions of funds, like not investing them in in stock markets, mutual funds and other assets, are tough for entrepreneurs. They restrict the ability of the company CFO to manage funds in the best interest of the business.

There is also a need to make it easier for start-ups to attract talent by offering ESOPs. Even after Budget 2020, tax on ESOPs are levied when they are exercised, rather than when they are sold. This causes hardship for employees of start-ups. Budget 2020 postponed the taxation by five years, but this is just kicking the can forward rather than solving an issue permanently.

To truly make start-ups self-reliant, these pain points need to be addressed immediately.

Vivek Ananth Research Analyst

Published on July 23, 2020

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