When over a third of India’s 39,000 start-ups have received a notice from the taxman asking them to pay taxes on the angel investment they have received, it is obvious there is a serious problem. More so given the fact that the government takes start-ups seriously, even has a Start-up India policy to encourage start-ups and also a fund dedicated to them; that the fund hasn’t really taken off, though, is testimony to how long it takes for government intent to translate into action. These startups, according to Inc42—a media platform dedicated to the start-up ecosystem—have got a total funding of $38.5 billion since January 2014 and are, today, valued at around $130 billion, making it clear that the value they are creating is quite large. That, in turn, reflects the investors’ view that these startups are going to disrupt various markets with the new solutions they offer, whether it is fintech or healthtech or some other area.
While, in principle, investments received by companies are not taxed, in the case of angel investors—their investment in start-ups is likely to be around $5-6 billion so far—the taxman has apprehensions that this may be black money being routed into start-ups as a way to launder it; investments made by Sebi-registered funds, on the other hand, are not taxed. Taxing angel funding never made sense since, once the money comes in through a bank—no start-ups are accepting large sums in cash—the money is traceable with the PAN and other such details are available; indeed, start-ups could also be asked to put down the PAN number of investors again. To the extent the money is sought to be laundered, this can only be done if the start-up gives most of this back to various front firms of the investor; since all payments will be by cheque, this too is easily traceable, so it is not clear why the taxman is making life difficult for start-ups.
Despite this, however, the tax notices were sent out. However, once the industry raised the issue forcefully, the government said it would set up a panel of IIT/IIM experts to deliberate the matter and, on Wednesday, clarifications were issued by the government—no tax would be levied on start-ups with a capital of less than Rs 10 crore if the investor has an income of over Rs 50 lakh and a net worth of more than Rs 2 crore. This is a step in the right direction, but a grudging one. Why should a start-up pay taxes if it gets more than Rs 10 crore in angel investment through its lifetime, and will this apply to just the amount in excess of Rs 10 crore or to the total? And, since at least a fifth of all angel funding is from friends and family, the Rs 50 lakh/Rs 2 crore criterion is a stiff one; worse, each time an investment is made by someone who is not registered with Sebi, the investor has to apply for an exemption for the firm he/she is investing in. Theoretically, all investors—including corporates, since the tax exemption doesn’t apply to them if they are investing directly—can register with Sebi to solve the problem, but the idea is to make investment simple, not tough. Most interestingly, while the idea behind the clarification was to provide relief to the start-up industry, the circular is clear that this doesn’t apply if the taxman has already passed an order. If the government truly wants to help start-ups it needs to do a lot more, not in terms of giving them money, but in terms of getting out of the way.