The start-up ecosystem, comprising entrepreneurs, venture capitalists and angel investors, is looking forward to the Budget, hoping for relief from its biggest bugbear: angel tax. The government currently treats any capital raised by an unlisted firm, especially at an early stage, as taxable income if it is above the fair market value (FMV). What is even more contentious is that there is no set formula to arrive at the FMV. V Balakrishnan, chairman, Exfinity Venture Partners, said, “The start-up ecosystem wants regulations to be simple and clear and angel tax reduces the confidence of entrepreneurs and investors. It is time for the government to withdraw this regulation.” Industry players agree that the government’s intention of introducing such tax was to prevent money laundering, but the actual implementation is turning out to be cumbersome for the start-ups. Sanjay Khan of iSpirt, said: “Though the intention is good, the play-out has been bad. Certain well-meaning investments are being questioned.”
Avinash Tiwari, co-founder and director of pCloudy, said, “At this stage when the start-up ecosystem has matured enough, more impetus should be given on increasing the tax incentives and faster clearances. Considering the slump in valuations in subsequent rounds of funding by the start-ups, we look forward to the government providing necessary clarity for invoking anti-abuse provisions on taxation of issue of shares at higher than FMV.” The government did try to alleviate the concerns around angel tax, but the resultant rules turned out to be bureaucratic. The other issue impacting start-ups is that most of them, which are in early stages, raise funds largely from multiple angel investors who are treated as a collective investment vehicle by market regulator Sebi.
There are also other issues which concern the investment community, especially on the tax holiday given to the start-ups (in three out of seven years from the date of incorporation). Angel investor Nagaraja Prakasam is of the view that the number of years should be definitely extended as a very few companies are able to scale their operations in just a few years. He provided the example of Uniphore, which received angel investment after being seven years in operation.
* With the country reported to have the third-largest base of start-ups at about 5,200, the start-up ecosystem definitely needs a boost through new regulations