Finance minister Pranab Mukherjee has taken a wild swing at angel investing, and it has the potential to strike at the very root of New Economy initiatives. His proposal to tax any startup, for capital raised from resident angel investors, has the muscle to grind such an investment to a halt. The amendment, which is likely to be effected from April 1, does not apply to registered venture capital funds. This hurts first-time entrepreneurs and startups, who are greatly dependent on individuals and angel investors.
?Much of early stage and angle funding comes from non-venture capital undertakings (VCUs) and that is where this clause will have a negative impact,? says Vishal Mehta, co-founder and Partner, Lok Capital.
The move is a foil to norms in other economies. In the UK, for example, capital gains and investments in companies at nascent stages are tax exempt. It will also force startups to raise capital from foreign funds, which would hurt Indian investors, forcing them to look at a variety of other assets.
?Further subjectivity has been introduced by bringing in a clause that the fair market value has to be ?substantiated? to the satisfaction of an assessing officer, who may or may not be an expert on valuation of emerging businesses,? says Mehta.
?Besides being regressive, the move is also discriminatory,? Suresh V Swamy, executive director, Tax & Regulatory Services, PwC India, told FE. ?Why will startups look at domestic funds, when they don’t have taxes on funding by foreign angel networks,? he asked.
This is at a time when investor interest in business incubation has been on the rise. According to data from VCEdge, a financial research provider, angel investments in India have doubled between 2005 and 2011. While there were only six deals in 2005, with a total value of $7.6 million, 2011 closed with 41 deals worth $14.14 million. In the first three months of 2012, there have already been 15 deals, says Venture Intelligence, a PE- and M&A-focused research firm.
Recent additions in the investor circle also bears testament to the trust being placed on India’s budding entrepreneurs, with some popular names in IT and ITeS startups. The month of March alone has seen three new entries – Andy Jasuja, founder of Sigma Group; Naveen Tiwari, founder of InMobi; and Sunil Singh, managing director, GlobalLogic India. Rajan Anandan, managing director of Google India, is reported to have over 20 angel deals under his belt, half of which have been done through the Indian Angel Network. Raman Roy, chairman and managing director of Quattro BPO Solutions, and Deep Kalra, CEO of Makemytrip, have also been active in the angel network.
According to those familiar with the situation, the investor community is now getting together through various associations to appeal to the government to relook the taxation proposal. Says Sanjay Swamy, managing partner, AngelPrime, a business incubator, ?On the face of it, this is a worrisome proposal, but having said that, there are deeper considerations to be made. I hope that there will be more clarity on it in days to come, after reasonable discussions. This proposal is not anywhere close to the final shape.?
However, the finance minister has some relief in store for venture capital and private equity investors registered in India, with a proposal aiming to make all exits 100% tax free. So far, tax-exemption exits were possible only in nine sectors – nano-technology, hardware and software development, seed research, biotechnology, R&D of new chemicals and medicines, production of biofuels, hotel construction, and development and operation of any infrastructure complex, dairy and poultry facility. The new proposal could lead to investments in previously unattractive sectors, and encourage the creation of more homegrown funds.
?The tax exemption will boost investment, most of all, in multi-brand retail, as that sector has been relatively closed to FDI. In addition, domestic VC funds will be a new asset class for high net worth individuals and financial institutions to invest in,? says Gaurav Saraf, director, Epiphany Ventures.