Silicon Valley investors who once welcomed Prime Minister Narendra Modi’s Startup India initiative are upset that the Indian government is now seeking startups to pay 30 percent tax on investment.
Investors here are unclear what steps to take in the face of India’s bureaucratic shifts.
“Yes, I was shocked when I heard of it,” said Kanwal Rekhi, a veteran Indian-American venture capitalist, angel investor and managing director at Inventus Capital Partners.
“Taxing angel investments is one of the most absurd things I have ever heard. Mind you, they are taxing investments, and not a gain on investments,” Rekhi told indica.
Startup India is Modi’s signature program to encourage entrepreneurial activity in India.
According to Rekhi, the initiative is being managed by people with no knowledge of the process. These people are coming up with meaningless rules that are detrimental to the ecosystem, he said.
BJ Arun, newly elected TiE Silicon Valley president told indica, “It was shocking that the nascent startup ecosystem in India, which needs angel funding, is being stifled with such a draconian measure.”
Angel investment in India is down by almost 60 percent; this does not bode well for the country in the long run, he said.
Arun said that since many TiE charter members are angel investors, the organization has a big role to play. TiE chapters in India are already seeing the impact of this measure with startups spending more time in statutory filings than in building their business, he said, adding that investors are also spending time and energy replying to notices from tax authorities. According to him, the process is penalizing legitimate angel investors who are taking immense risks by funding startups.
“TiE is against angel tax being levied. We have [asked] the Ministry of Finance and the CBDT [Central Board of Direct Taxes] to abolish the relevant section 56 2 (viib). After the recent budget, CBDT has announced a process for startups to register with them and therefore be exempt from this provision. However TiE’s stand is that angel tax should be abolished.”
Arun said members of TiE Silicon Valley have helped formulate the Startup India policy and hence have some influence, including the ear of the prime minister and other policy makers.
Venture capitalist and angel investor Venkatesh Shukla, a former chair of TiE Global and president of TiE SV, and Asha Jadeja Motwani, an angel investor, have come out strongly against the angel tax. They spoke to Amitabh Kant, vice chair of Niti Aayog (or the National Institute for Transforming India), and other policy makers and told them of these concerns.
The angel tax dates back to the Finance Budget of 2012 when then finance minister Pranab Mukherjee announced the introduction of the Finance Act 2012 to curb money laundering. But investors and startup were shocked when several startup founders across the country said they have received tax notices for funding raised more recently, in the last few years.
Meanwhile, the National Association of Software and Services Companies, a trade association of Indian technology firms, has also urged the government to scrap the angel tax imposed on startups and instead focus on ways to encourage them. Even seed stage funding has apparently been affected by the angel tax, dropping by 21 percent in 2018 and 50 percent in 2017.
According to The Economic Times, the new procedure says that to seek exemption, a startup should apply, with all documents, to the Department for Promotion of Industry and Internal Trade. Applications from recognized startups would be then moved to the CBDT to permit an exemption.
The details demanded of the startups include account details and return of income for the last three years.
As per the Startup India action plan, a startup is any entity, incorporated or registered in India but not older than five years.
According to the media report, at least 80 startups have received notices to pay angel tax since last year. Many founders said they would have to pay as much as 30 percent of their funding as tax. Angel investors have also received multiple notices asking them to furnish details about their source of income, their bank account statements and other financial data. Getting valuations from merchant bankers is more expensive for startups than relying on chartered accountants.