Startups face angel tax dampener, but hiring and growth plans on track in 2019, says survey

A survey by LocalCircles has found that issues on the taxation front and the difficulty in raising funds to be major challenges for startups in India in 2019.

The year 2018 did not end on a high note for the Indian startup ecosystem as the demon of angel tax dampened their spirits once again. But these young firms are cautiously optimistic about 2019, with focus on increased hiring and aggressive growth plans.

LocalCircles, a leading community social media platform, in its survey of 15,000 startups, SMEs and entrepreneurs receiving 40,000 responses to gauge their mood, revealed that angel tax remained the top most issue on their minds.

“Angel Tax continued to be a key pain point for startups, where the assessing officers in many cases reject the valuation method utilised by the startup and instead treat the capital raised as income from other sources thereby raising a tax demand and penalty on the startup,” the survey noted.

According to the survey, 97 percent of the respondents felt there was an urgent need for the income tax authorities to be educated on startup valuations. Startups continued to receive I-T notices in 2018, which was at a similar level as 2017, which reveals that there was no significant improvement on the taxation front.

Sachin Taparia, chairman & CEO, LocalCircles, says, “The real challenge lies with the smaller startups, which require angel funding. These firms are struggling and hope there is an early resolution.”

Despite this backdrop, the overall mood among the startups and SMEs remain moderately upbeat. The LocalCircles survey revealed that 71 percent of them wanted to grow their business in 2019, with 5 percent wanting to sell their operations, and 24 percent of them wanting to completely shut down.

This optimism also extended onto the hiring front as an overwhelming 83 percent of the respondents showing strong hiring plans in 2019 with the rest stating that they would be reducing headcount.

However, there are a few challenges facing the startup and SME segment in the country as 37 percent of them expect funding to be a major stumbling block in 2019, while 45 percent of the respondents felt that bureaucracy could hinder their growth.

At the same time, an overwhelming number of startups were not very enthused about the government’s Startup India Mission, as 82 percent of them did not receive any benefit from this scheme. This also extended to the states where the startups are located, with majority of them stating that there has not been much difference in their environment with only 14 percent of them saying it has made it easier to do business than before.

According to LocalCircles, “The India startup and SME ecosystem, with all its fingers crossed, is hoping that the coming year would be better and brighter with more government support especially in matters like angel tax.”