Government may exempt startups from startup tax incorporated earlier

Source : Economic Times Startups currently in the market for angel funding may soon not have to worry about the taxman or relocating overseas, as the Government may exempt startups from startup tax incorporated earlier. The government is working towards a solution to ring-fence angel investments that are currently taxable under the Income Tax Act. The move, if pushed through before or in the upcoming Union Budget, would help accelerate the growth of the domestic angel investor community and stem the drain of startups and critical intellectual property to overseas locations such as Singapore, North America and the UK.  image source : http://pando.com“Startups create jobs and intellectual property and catalyse FDI (foreign direct investment) by attracting venture capital. Because of the current tax regime, startups are being compelled to incorporate overseas,” said Saurabh Srivastava, founding and managing committee member of Indian Angel Network (IAN), which is leading the recently constituted Association of Indian Angel Groups on discussions with the finance ministry on amending the rule. 

The amendment under discussion seeks to exempt investments not exceeding Rs 10 crore from Section 56 (2) of the Income Tax Act, provided that such investments are made through registered angel groups.Under the current rule, introduced in Finance Act 2012, capital raised by an unlisted company from any individual against an issue of shares in excess of fair market value would be taxable as ‘income from other sources’ under Sec 56 (2) of the I-T Act. “Startups are now liable to pay a 33 per cent tax on any investment they receive. In other words, if they need to raise Rs 2 crore, they will actually have to raise Rs 3 crore. Hence, they will have to dilute ownership by 50 per cent more than they normally would have,” said Srivastava.

We had writeen on this topic on YourStory.com – read here for more

The introduction of the so-called ‘angel tax’ in Finance Act 2012 unleashed a backlash from the startup and angel investor community which prompted some damage control by the authorities. In June 2013, markets regulator Securities and Exchange Board of India formulated rules that would recognise angel funds as a sub-category with a smaller corpus requirement under the SEBI AIF (Alternative Investment Funds) Regulations 2012. Thus, capital raised by startups from SEBI-registered angel funds in approved investee companies, even if above fair market value, would not be taxable. However, this implies that organised angel groups such as IAN and Mumbai Angels would have to create funds. Currently such groups only aggregate individual investors.

The amendments under discussion, if taken on board, would directly benefit organised angel investor networks such as IAN, Mumbai Angels and Hyderabad Angels. IAN is currently the largest organised angel investor network with 350-odd members and more than 60 investments to date. In 2014, such networks along with high-profile individual angels such as Google India chief Rajan Anandan, iSprit founder Sharad Sharma and AppLabs founder Sashi Reddi, pumped $115 million into 285 startups, according to data from VCCEdge. This, however, is miniscule compared with the late-stage capital that venture capitalists invested, closing off 2014 with $2.1 billion.Section 56 (2) though would continue to apply to investments made by individual investors who are not yet part of any organised angel investor group. However, with the government looking to recognise angel groups as legitimate entities for such investments, individual investors would have the option to create new groups.
 
“The population of genuine investors who are willing to put money on the table is not growing fast enough. This move will encourage more investors to participate in funding startups,” said Ravi Kiran, founder of Mumbai-based startup accelerator and angel network Venture Nursery, which has 30 angels in its network.The current tax system and other regulatory roadblocks in India are compelling startups even at the pre-revenue stage to seek home overseas. A number of angel investor groups  that ET spoke to said, though off the record, that they have been actively advising investee companies to move to countries such as Singapore and the UK which offer tax credits to startups. “Nearly a quarter to a third of our investee companies are incorporating overseas because of the ‘angel tax’,” said a source at a leading angel investor network.
 
The drain of capital and intellectual property is already in evidence among mature startups. ET had previously reported that 2015 would see a mass exodus of technology startups as companies seek investors and better regulatory environments.”The angel tax is an issue but it is not the only reason for startups moving headquarters overseas,” said Sunil Goyal, founder of Delhi-based angel fund YourNest Angel Fund. “The overall absence of ease of doing business in India and the comfort of overseas clients to deal with startups based in the UK, US or Singapore is pushing us to evaluate such options for our portfolio companies.”