An early resolution of the Angel Tax issue remains the top priority for investors in the Indian startup ecosystem, and they are hoping the Budget will have the answers.
The Interim Budget 2019 is just around the corner, and the Indian startup ecosystem is hoping that the BJP-led NDA government will continue its support for entrepreneurs and young companies. Startups and investors alike say the biggest worry for them at present is the controversial Angel Tax.
Given that India will be going to polls in the next couple of months, there are expectations that the Budget would largely focus on welfare measures. Among these, startups are hoping the government will lay down a framework to lessen the burden of Angel Tax and resolve issues with its implementation.
Padmaja Ruparel, President, Indian Angel Network (IAN), says, “We have to both acknowledge and ask. We would like to acknowledge that this government put the startups in the spotlight and have taken numerous forward-looking measures. The ask is very simple; in an entrepreneur ecosystem, it is very difficult to raise money, and steps should be taken to enable further infusion of capital into the ecosystem.”
The Indian startup ecosystem raised $12.68 billion in equity funding, and $1.14 billion in debt funding in 2018 from foreign and domestic investors with the former dominating the investments. If the Indian startup ecosystem, which is the third largest globally, has to grow at a faster clip, hurdles towards capital inflow have to be removed, say investors.
Siddarth Pai, Founding Partner and CFO, 3one4 Capital, says,
“For the investors, top on their list is that the issue of Angel Tax is sorted out in a manner which is satisfactory to all parties. Steps should be taken to mitigate the hardships of the entire ecosystem.”
He expects Finance Minister Piyush Goyal to take steps to incentivise investors to put their money into startups without any counterproductive clauses in the regulation.
V Balakrishnan, Founder and Chairman, Exfinity Ventures, says, “Even though the government is trying to streamline the Angel Tax process, every new measure has added to the complexity. So, the issue has not been solved. The government should, once and for all, settle the matter. Budget is the right place to do that.”
“The Angel Tax provisions have been misused by tax authorities that have been impacting the startup ecosystem in a big way. We have an absurd situation where startups have to raise money to pay tax.” He adds.
Beyond Angel Tax
Going beyond the issue of Angel Tax, investors also hope the Budget will have a broader set of regulations to encourage the inflow of capital without being hindered by red-tapism.
Vikram Gupta, Founder and Managing Partner, IvyCap Ventures, says, “There should be increased focus on encouraging domestic and foreign capital for venture capital funds improving the limited partner ecosystem in the country.”
He suggests three key points for the Budget
- Encourage Indian banks to invest in venture capitalist funds and lend to startups by modifying RBI guidelines and treating such investments under priority lending rather than under capital market exposure.
- Encourage creation and utilisation of endowment funds at educational institutions by giving tax exemptions to such funds if they invest in Alternative Investment Funds (AIFs).
- Ease out policies related to investments by pension funds in AIFs.
The current government has given the entrepreneur ecosystem a push through the Startup India Mission, but there were several implementational challenges which limit the potential of this segment. Siddharth says the government’s Fund of Funds for startups, which has a corpus of Rs 10,000 crore and is operated by SIDBI, could start making direct investments, especially in early stage companies, which would act as a morale booster for the ecosystem.
Tax authorities’ scrutiny of Indian startups has also made a good number of entrepreneurs uncomfortable. On startups receiving tax notices from the Income Tax Department, the Indian Venture Capital Association (IVCA) says, “Send notices from CBDT in the future only to a select percentage of startups, say 5 percent, based on ‘markers of suspicion’ rather than carpet bomb all startups.”
Current regulations also state that a startup has to deposit 20 percent of a tax demand raised before the entire process of resolution begins. According to IVCA, “Startups are capital starved and is tough for them to deposit any percentage of the tax demand amount before they go on an appeal. It is imperative that a quick notice resolution process be put in place, or there is a waiver of the 20 percent pre-appeal demand.”
“If the government wants to monitor round tripping and other issues, there are other laws that can be used to track and monitor,” Balakrishnan adds.
This Budget, encourage domestic capital
The unanimous voice among the investor community is that there is domestic capital available and the government needs to take measures to encourage it to be invested in Indian startups.
Padmaja says, “This (startup investment) can be an asset class in the portfolio of high networth individuals (HNIs). The government needs to figure out a mechanism where such investments are encouraged and not discouraged.”