Startup Tax: Taxing a Risk Capital?

By Team YS|23rd Mar 2012
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Government should regulate angels and announce tax sopsLooked at any angle, the startup tax seems a punitive step to discourage a startup from raising money from angel investor, suspecting the source of money or is it that the government wants to tax what it thinks is a “free” money to the startup that goes without tax. The terminology seems very wrong here. An investment is not an income. It’s capital for a business. Such capital may diminish in value, result in loss or gain. The capital may not yield sufficient returns in some cases. Further, the angel is risking his investment unsure of returns. And startups also pump in this money expecting positive returns and not all times they may be successful. The basic premise of tax seems to be shaky.

It is widely believed by experts talking to YourStory that this Startup Tax is meant to discourage black money infused as angel investment, not in tech but in other sectors such as education. One entrepreneur confided in us that corruption and underhand dealings are rampant in his operative domain. He is fighting competitors raising money through stacks of notes rather than cheques.

Instead of taxing the entrepreneur and the startup, why not do this?

  • Bring in an amendment similar to Companies Act to stipulate that all angel investors should be registered. Only after government approves their registration, they can invest. The government can put a cap on the size of their investment depending upon their capability and known sources of income.
  • The angel investors identify the sectors they will invest in. The government now can keep a tab on how many angels exist in which sector.
  • The angels should submit similar to Income Tax returns an investment portfolio every year, making their investments transparent. This will show investments sectorwise and the quantum of investment.
  • Tax relief for angel investments in select sectors to encourage innovation, job creation and entrepreneurship.
  • Individuals or networks of angels investing beyond a specified amount (say Rs. 5 crores) should be given higher tax relief, even to the extent of 100%, as their risk propensity is high.

—Venkatesh Krishnamoorthy, chief evangelist

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