Startups await govt policy to ease their concerns

Even as speculations are on that there will be an angel tax protection plan for startups setup before 2016, the government is yet to come up with a policy to ease their concerns. 

Startups often find it difficult to get fundings from angel or venture capitalists and it is also challenging task for an entrepreneur to pool funds from family, friends, and acquaintances. Because of funding problems, many startups die premature deaths. Besides angel tax, a startup has to pay other taxes as well if it is incorporated before 2016 and have got funding of more than Rs10 crore. 

"There is a news that startups which are incorporated before 2016 and have got funding less than 10 crore they will have an exemption from Angel Tax. But, this also has a clause attached that DIPP will access the valuation. However, there are no real measures decided on what the evaluation will take place, said Sakshi Bhasin Tulsian, Founder, POSist Technologies.

Evaluation is decided after a mutual talk between an investor and the startup, which depends upon the current model, strategy, and future growth. Thus after a year, evaluation can go upwards or even decrease and DIPP will not be able to make a proper evaluation,” Tulsian said. 

"There is no proper communication on this from the government. This will give the assessing officer to judge the 'Fair Market Value (FMV)' of a startup and tax all investment at a valuation above this FMV as income," said Shilpa Bhatia, founder of The Clothing Rental. 

"Angel tax should not be taken into consideration whenever a startup gets funded then that money is planned for setting up new business and growing it." 

Bhatia said there are other taxes too which a startup has to pay and there can be some concerns from the investors as well who can refrain from a startup. Thus a lot of startups will not see angel funding and a decrease in number of ideas that could have gained value and employment opportunities also.

She further reiterates that an angel tax will be detrimental to startup ecosystems as getting fund from family, friends, angel, and VCs is an extremely challenging task for an entrepreneur.

Often times a founder struggles alone to explain their concept and viability of their business. 

Starting a business takes courage and self-confidence. Adding tax to such segment is rather strange, where government should be supporting new and small businesses as they are the backbone of a strong economy, She added. 

"Taxing them is like drinking the little-left juice from the business and diverting it to where there is no accountability to where the money will go. I am totally against such concept. Our business is already struggling to cope up with service tax (18% GST). Our consumers rather walk away than pay the added tax."

Now, if the government adds this another layer, I wonder how the business of even our caliber would survive, she said. 

“Angel tax is a 30.9 % tax levied on investments made by external investors in startups or companies.To clarify, the entire investment is not taxed – only amount that is considered above “fair value” valuations of the startup, classified as ‘income from other sources’ in the Income Tax Act of India, ” Ripu Daman, founder of Perpaa.com, an online startup for beauty products.

Angel tax was introduced in 2012 to tax the companies who raise the capital in excess of their fair market valuation. This tax is not levied on startups recognised by the DIPP under the Startup India policy.  But, startups prior to this policy was introduced have been subject matter of review and examination by the Income-tax department and there have been instances of notices being sent by the tax officials to review the valuation of such startups. The Budget 2018 did not provide any clarity or relief from this tax even though it acknowledged the importance of startups in India's growth story.  

Taranpreet Singh, partner at TASS Advisors, said, "Recently it has been reported in media that the Finance Ministry has started discussions with the DIPP to bring startup recognisation plan wherein pre-2016 genuine startups would be recognised by the DIPP, shielding them from angle tax. This step of the government is very encouraging for startups, as it is important to have a clarity to avoid any tax disputes/ litigation. At the same time, this is going to foster a conducive investment environment in India supporting new ideas and making funding easy."