Investors welcome fix to angel tax rules in India

Ritu Jha-

 

John Chambers, chairman of the US-India Strategic Partnership Forum, welcomed the quickness with which the Indian government addressed the issue of angel investors being taxed in that country.

“This government has been the most responsive, of any government in the world,” Chambers told indica in the sidelines of the first 2019 west coast US-India Strategic Partnership Forum held in Palo Alto early this month.’

“It took me 17 years to get a tax changed in the US on corporate income tax,” said Chambers, who is also the former CEO of Cisco Systems. “So, I want to once again say ‘thank you, Indian government.’”

He agreed that investors were still not clear if the problem had been resolved in full.

“It looks very good so far, and I think we got about 90 percent on what we were after,” he said. If it [done] the way I hope, I think it is a positive …about startup and job creation.”

He laughed and added, “It takes an act of courage to move that fast. We can learn some lesson in the US from India.”

Introduced in the Finance Act of 2012, the angel tax was intended to curb money laundering through the purchase of shares at a high premium. It drew controversy when investors in startup companies were flooded with queries from the income-tax department.

Section 56(2)(viib) of the Income Tax Act provides that the amount raised by a startup in excess of its fair market value is taxable at over 30 percent. After investors and Silicon Valley venture capitalists complained, the government amended it.

However, as per an official notification, of February 11, the definition of startups has also been widened. An entity shall be considered a startup up to 10 years from its date of incorporation instead of the existing limit of seven years.

The exemption for angel tax for shares issued or proposed has been hiked to an aggregate limit of Rs 25 crore ($3.6 million) from Rs 10 crore ($1.4 million).

Chambers lauded the Modi initiative, saying, “He has made a tough decision. And he has within his six months of his power has implemented demonetization and GST.”

Chambers, who is close to the government, has been conferred with Padma Bhushan, the third-highest civilian award conferred by the Government of India.

Harsh Vardhan Shringla, India’s ambassador to the US, said of the angel tax:

“It’s been dissolved and given a liberal view on startups and giving them, significant tax benefits and we have also upgraded the financial levels and the period for which they are recognized as startups,” he said. ”Other benefits given are in the patent, public procurement and it’s a policy I think is accepted. The glass always looks half empty but it’s half full.”

Mukesh Aghi, president and CEO of USISPF, was less sanguine.

“When the rule of game change halfway that is not healthy,” he said, adding that despite the details not being available, the decision seemed a step in the right direction.

“This is election season and I think once the election is over you will see more predictability and more transparency. We are hoping for that,” he said. “The sentiment is really strong. US exports to India have gone up by 26 percent. Indian exports to US is up. Trade is up overall. Every US company is making money in India. So, overall, the sentiment is very strong.”

Rajeev Madhavan, a serial entrepreneur and a founder and General Partner of Clear Ventures, told indica, “The amount of jobs created by startups is worth a lot more in taxes than what you get by penalizing one angel. We have an election coming around and I am sure they want to appeal to the masses.” He said after the elections the focus would likely shift from the electorate to investments.

Praveen Akkiraju, managing partner at SoftBank Investment Advisers, said was happy with the Indian government’s engagement and willingness to modify regulations to be more friendly than they have ever been.

“It’s new for them and they are open to dialogue and not rigid. In general terms and, hopefully, the government will continue to evolve and take feedback and help us give a right kind of framework to encourage innovation,” Akkiraju said.

Tarang Shah, managing director at Atlas Technology Group, LLC, said the regulations had worried investors.

“The angel tax has impacted some companies I am looking at. They are nervous. This is going to stagnate innovation,” said Shah. “They are very angry because other governments around the world give long benefit.”

“If the government wants to make money out of innovation the way to do it is don’t take a slice of the pie when the pie is very small. Give it the environment to grow,” he said.

Chambers also addressed the issue of concerns about abrupt changes in regulations, like those that affected big e-commerce giants like Walmart and Amazon, effectively banning them from selling products in which they have an equity interest and from making deals with other firms.

“There are always two sides to every discussion,” he told indica. “It’s very important to balance the two sides…” He said the focus and commitment of these companies to India are amazing.

“But at the same time on a broader issue it is legitimate to say how do you do proper sharing of data,” Chambers said. “Data is the new oil, and whoever collects data on the consumers and the companies has a unique advantage within a country, So it’s a healthy give and take on what is going on. And I would be surprised and disappointed if we don’t navigate it well.”

Last year, Walmart invested $16 billion and acquired a 77 percent share in Flipkart, but has been considering moving out of India. This comes at at time Morgan Stanley said India’s booming e-commerce market sector could grow to $200 billion by 2027.

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