The Union Government’s decision to tax startups raising angel investments (now came to be known as the startup tax) through an amendment in the Income Tax Act in the Union Budget 2012-13 presented by the Hon’ble Finance Minister has received negative reaction from the industry, investors and entrepreneurs. The Government has appointed Mr. S. Ramadorai, adviser to Prime Minister and former CEO of TCS, to review this amendment. While the state of affairs in India has turned startup/angel-unfriendly, the federal government in the US, several states in that country and the UK are providing tax sops to angel investors. Angel investors in Canada are pressing for a new regulation to provide tax relief similar to UK.Angel investor credit programs in US
According to OLR Research Reports on State Angel Investor Credit Programs, “At least 21 states offer income and business tax credits to angel investors for investing in newly-formed, technology-related businesses. These investors tend to be wealthy individuals looking for opportunities to develop and establish new businesses in areas that interest them.” The credits range from 15% of the investment in Colorado to 100% in Hawaii. Some criteria are used to qualify investors (for example, high networth individuals in Kansas) and targeted investment in certain sectors (for example nanotechnology in Winconsin). The report further states that, “Eleven of the 21 states enacted angel investor tax credits since 2005 (Arizona, 2005; Arkansas, 2007; Colorado, 2010; Connecticut, 2010; Kansas, 2005; Louisiana, 2005; Maryland, 2005; Minnesota, 2010; New Mexico, 2007; Rhode Island, 2006; and Wisconsin, 2005). Most of the states authorized the credits for a specified time. For example, Connecticut's credits expire in FY 2015. None of the states repealed the credits, but two allowed them to expire—Hawaii, in 2010, and Louisiana in 2009. ”
Further, a provision of the Small Business Jobs Act of 2010 provides a 100% exemption for gains made in qualified business stock. Basel Peters, author of Early Exits and member of the executive of the Bellingham Angel Group, says in his blog: “I was very pleased to learn how the new tax treaty between the US and Canada works for angel investors. This is my understanding from the web conference as it relates to US angels investing in Canadian companies: If a US angel invests directly into a Canadian company there are no additional taxes to pay at the time of the sale.” About a third of the investments from the Bellingham angels are in Canadian companies, according to him.
Tax breaks in UK
According to iBusinessAngel.com, “The UK government has made it a priority to get funds into small fledgling businesses and will offer a 50% rebate – even if the individual making the investment isn’t paying 50% income tax. What is more, if you make a capital gain in the tax year 2012 / 13 and invest that money in a startup, then you’ll also get the 28% capital gains relief – a massive 78% relief in total.” This applies to investments made after April 6, 2012.
According to Allan Riding, a leading Canadian expert on angel investing and professor at Carleton University, angel investments are $18 billion a year, which is three times the investment rate of institutional venture capital (from About.com).
The National Angel Capital Organization wants the Government of Canada and provincial governments to “adopt an Innovation and Productivity Tax Credit (IPTC) similar to the UK’s successful ten-year-old Enterprise Investment Scheme and B.C.’s Small Business Venture Capital Program.”
Most of the angel investments in India are in the tech sector and the angel investors don’t get any tax relief and the investments are typically in the range of Rs. 30 lakhs to Rs. 3 crores.
Rajesh Setty, entrepreneur, speaker, and angel investor in the Silicon Valley sums up the present IT Act amendment aptly, “You can’t move forward when the car is in the reverse gear.”
It would be heartening if Mr. Ramadorai makes a recommendation to Union Government to provide tax relief to angel investors instead of startups short charged on angel investments.
—Venkatesh Krishnamoorthy, chief evangelist