Budget wishlist: remove Angel Tax, offer incentives to help startups flourish

Wednesday January 31, 2018 , 5 min Read

As an entrepreneur turned angel investor I meet start-ups and entrepreneurs daily. Startups in India have varied requirements that need to be addressed by the Government with an open mind, and financial eye.

Prime Minister Narendra Modi had ignited a billion minds with Start-up India and Make in India. With a large number of unemployed youth, this is the need of the hour. The current Government has done a lot to help the startup ecosystem, but its mantra of minimum government and maximum governance seems contradictory when one looks at the Angel Tax, or recent news where the Income Tax Department asked ecommerce sites to reclassify discounts as capital expenditure.

For any budding entrepreneur, access to capital is the most critical factor to success. The government needs to have a broad-based programme to ease the flow of equity capital and credit to entrepreneurs and startups.

A good idea would be to look at incentives being given in other countries – most programmes involve grants, access to credit and tax credits to investors.

The Israeli prime minister had recently visited India, and I hope the government learns from Israeli programmes that promote entrepreneurship. It would be interesting for readers to know that in Israel, the Angels Law is an incentive to invest in startups by deducting the investment amount, up to NIS 5 million (approximately $1.5 million), of their taxable income, produced from any source for up to three years.

Now compare that to our Angel Tax. Israel also has an excellent grants and tax incentive programme to promote entrepreneurship, spur R&D, tourism, and even a special fund called the ‘Nitzan Fund’ to incentivise agri research.

The US government too has several programmes that encourage business to create and retain jobs, make capital investments, promote development in rural areas, and promote innovation.

The US Small Business Administration has been established to fund entrepreneurs and small business where private banks may not be inclined to. There are also a host of other grants, like the Small Business Innovative Research Grant programme that provides $2.5 billion in annual grants.

The Indian Government has done good work with the Atal Innovation Mission and Atal Tinkering Labs, which focussed on grants to educational institutions. However, to accelerate commercialisation, they need to partner with private for-profit incubators and accelerators.

My budget wish list includes the following three major reforms that will ease the flow of capital to startups:

Tax incentives

Countries like Israel, China and the UK provide incentives for money to be invested in startups by making some, or all of the invested capital tax deductible to a certain limit.

Along the same lines, the government can encourage broader equity participation by removing capital gains on exercising ESOPs.

The Angel Tax must go, or should only be applicable to startups over a certain valuation (say $10 million). Investing in startups is not like real estate, where there is a circle rate!

Allow equity crowdfunding

I am sure all of us have heard of Kickstarter, which, since 2009 has seen 14 million people contribute $3.5 billion to 130,000 projects. However, equity crowdfunding is banned in India.

In a press release issued on August 30, 2016, SEBI said: “The electronic platforms are allegedly facilitating investment in the form of private placement with companies, as the offer is open to all the investors registered with the platform amounting to a contravention of the provisions of Securities Contract (Regulation) Act, 1956 (SCRA) and the Companies Act, 2013.”

We can learn from the example of the US or Italy, which was one of the first jurisdictions to pass a comprehensive regulation on equity crowdfunding. Italy specifically allows for crowdfunding to support the development of “innovative startup companies”.

SEBI issued draft guidelines in April 2017, and I hope is passed this Budget.

Establish a small business bank

Any entrepreneur will tell you that it is impossible to get credit for working capital. If you are working without a salary, you cannot get a personal loan. If an entrepreneur turns to a microfinance organisation, the real interest rates can be as high as 24 percent. On the other side of the spectrum, venture debt providers look for large ticket sizes.

The problem is that of who would give a small startup Rs 25 lakh for working capital today? That is the unserved market.

The government has announced a loan programme, but unlike the US, where the loan process takes a week, the implementation is a challenge here. It would be great if the Government looked at the US, which has established the SBA. The Small Business Administration (SBA) is a government agency that provides support to entrepreneurs and small businesses by offering loans through banks, credit unions and other lenders who partner with the SBA.

They have an excellent microloan programme, where loans less than $25,000 require no collateral, and the agency offers credit guarantee for loans up to $5 million.

I can go on and write a long list of demands that startups and entrepreneurs want. If the Government can waive off Rs 100,000 crore of farmers’ loans, why not contribute Rs 10,000 crore to an SBA-type programme?