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Disciplining The Not So Angelic, Angel Tax

If you are an entrepreneur, investor, or simply interested in the start-up sector, then you already know that Angel Tax is the buzzword right now.

Based on a law that was introduced in the 2012 budget by Mr Pranab Mukherjee, the rule aimed to target money laundering through high share premium. But unfortunately, the same provision is today attacking startups for their “high” share premiums and treating the difference between book value and DCF (Discounted Cash Flow) projections as income taxable at 30%. (For those interested in a more in-depth study of the provision and associated rulings can check out this article.

Thus, a law to penalize shell corporations and sham transactions are now being used against startups employing tens of people and generating value for the community.  Valuations are usually based on a startup’s future potential for growth and revenue and using book value, a method that’s better suited to asset-heavy manufacturing industries, is like measuring time in light years – it sounds right but is blatantly inappropriate

Hence the problem. This section hasn’t kept pace with the other anti-laundering and anti-abuse measures instituted by law and has become a blanket provision with little opportunity for a Startup to distinguish itself from a fake business. It also specifically discriminates against domestic investments thereby discouraging both investors and startups from accepting investments from Indian residents.

Latest changes, notified just yesterday, provide some way out for certain startups. However, this is a partial solution to a much larger problem, the CBDT needs to solve for the basic reason behind the cause of Angel Tax to be able to give a complete long-term solution to Indian Startups.

While the share capital and share premium limit after the proposed issue of share is till 10 crores and helps startups for their initial fundraising, which is usually in the range of Rs 5-10 Cr. Around 80-85% of the money raised on LetsVenture, AngelList and other platforms by startups is within this range, but the government needs to solve for the remaining 15-20% as startups who are raising further rounds of capital, which is the sign of a growing business, are still exposed to this “angel tax”. Instead, the circular should be amended to state that section 56(2)(viib) will not apply to capital raises up to Rs 10 Cr every financial year provided that the startups submit the PAN of the investors.

The notification also introduces the concept of an “accredited investor” into the startup ecosystem, which is an acknowledgement of the role that domestic investors play. Globally, an accredited investor tag is given to sophisticated investors investing in risky asset classes to denote that they acknowledge the risks associated with such investments and that they have the financial ability to do so. But instead of fulfilling both criteria of income and net worth, they should follow the global model of fulfilling either criteria and lowering the threshold to 25 lakhs of income or a net worth of Rs 1 crore. Their investment into startups should be excluded from the scope of section 56(2)(viiib). As a process mechanism if the CBDT could put in place a simple once a year mechanism for the Investor to submit his returns and giving him a reference number valid for the financial year, this will enable him to invest in more startups in the year without the need to get permissions every time the investor invests his funds.

Most importantly, any startup who has received an assessment order under this section should also be able to for the prescribed remedies and submit this during their appeal. They should not be excluded from this circular since its stated scope is both past and future investments. The CBDT should also state that the tax officers should accept these submissions during the appeals process and take it into consideration during their deliberation.

So, to summarise:

  • The angel tax should not apply to any investment below Rs 10 crore received by a startup per year, from Indian investors provided that the startup has the PAN of the investors
  • The angel tax should not apply to investors who have registered themselves with DIPP as accredited investors, regardless of the quantum of investment
  • The threshold stated should be either a minimum income of Rs 25 lakhs or a net worth of at least Rs 1 crore
  • Any startup who has received an assessment order should be able to seek recourse under this circular during their appeal

Through this circular, DIPP has reaffirmed its commitment to promoting entrepreneurship and startups in India. With these suggestions, the spectre of the “angel tax” will end up as a footnote in the history of the Indian startup ecosystem. We look forward to these pending matters

Start up India, Stand up India.

The post is authored by our policy experts, Nakul Saxena and Siddarth Pai.

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Digital economy needs tax clarity

“Digital” is an inevitable and progressive catalyst of change. Whereas internet-based online transactions have existed for some time now, the transformations at a national scale are morphing many more areas together into a “digital economy”.

The transformation is about 100% dematerialisation up to the ‘last mile’, with near 100% continuous involvement of the internet and is built upon cloud computing. In India, the recent UPI launch will accelerate last-mile integrations and lead to a national cohesive market.

The digital economy is therefore about “digital goods” and “digital services” being stored, transported, or provisioned ‘digitally’ and exchanged using ‘digital money’. Electronic hardware, networking, telecom and e-commerce are about enabling this digital economy.

Tax regime—out of sync

On the other hand, governments globally have a huge challenge from the emergence of a digital economy which has the power to disturb or outmaneuver tax systems if not accommodated adequately and in a timely manner.

On the international front, the challenge is posed by technology diluting the efficacy of borders. The equalisation levy of 6%, introduced in Budget FY17, on the advertisement fees paid to foreign digital media companies, is a corner stone of the international problem of BEPS. In yet another example, since 2015, the EU has brought all digital goods’ B2C sales under VAT, irrespective of the country of origin.

On the domestic front, the challenges are created by a piecemeal approach from the tax authorities with respect to the evolution of this new economy ever since the internet and software delivery have proliferated. The fragmented system is not able to cope with new business models that are based on innovation and ideas where “software is eating the world”—as famously said by Marc Andreessen, a general partner at the prominent venture capital firm Andreessen Horowitz .

In some countries, Netflix users evaded tax when they procured directly online, as against paying taxes when procured through a partner. In India, the same ‘SaaS’ software is taxed only under the service tax component when procured through a service partner, as against service tax plus VAT when procured directly. The confusing tax systems create immense frictions for ease of doing business for digital goods and services.

The world has recognised the problem and started moving towards pragmatic solutions. India, with its 29 states and over 250 million internet users, cannot afford to overlook the taxation issues facing a digital economy.

On the domestic front, for indirect taxation, it is an opportune time for India to solve this problem with the GST rollout.

India has rightly opted for a ‘thoroughly digital’ system for implementing GST. However, to offer infrastructure to support a authentically ‘digital GST’, it also needs to integrate the digital economy’s taxation concerns.

The GST will solve many confusions, but must address several more of them. A single rate is always a good starting point. There are several unnecessarily imposed classifications of digital goods, and differential rates must be eliminated to simplify the mechanics. Additionally, the value chain of consumption of “goods” versus “services” is quite different, and must be reflected clearly in the definitions.

Accept digital goods as reality

A generally accepted principle across the ongoing discussions in the world of taxation on digital economy is that it does not favour a new or separate tax regime for ‘digital’. We must principally agree that the digital economy’s concerns should be overlaid and accommodated into the existing and evolving legal framework.

Despite a lot of confusion on this issue, the US has a well-drafted bill defining “digital goods” and “digital services” under consideration. The bill has adopted a simple and fair definition. The term “digital good” is defined as, “Any software product or other good that is delivered or transferred electronically, including sounds, images, data, facts, or combinations thereof, stored and maintained in digital format, where such good is the true object of the transaction, rather than the activity or service performed to create such good”. A “digital service” is defined as, “Any service that is provided electronically, including the provision of remote access to or use of a digital good”. This excludes services like telecom for fair sectoral treatment.

“Digital goods” therefore, is not just about music, video, images, or e-books. In fact, software products may be a combination of complex scientific computer programs or commercial applications with a combination of data types including voice, video, images, texts, document files and so on. We must account for the many permutations and combinations, and not limit the evolution of such products.

In order to make best use of the digital economy’s opportunities while achieving the objectives of a) increasing the tax base with a simple, fair and neutral tax regime, and b) promote an environment of business growth with ease of doing business, India must consider the following four measures in its tax systems:

One, free “digital goods” from the shackles of ‘royalty income’ under the garb of attached ‘copyrights’ in the Income Tax act. This binding of ‘royalty income’ on software and ‘intangible/digital’ goods is a bottleneck to trade in a digital economy.

Two, clearly define “digital goods” and digital services” consistently across the legal framework.

Three, provide “digital goods”, or intangible goods, the status of “goods” as defined in Article 366(12) of the Constitution. The digital goods, though intangible in nature, exhibit all properties of tangible goods generally acceptable in legal parlance viz. durability (perpetual or time bound), countability (number of pieces, licenses or users etc.), identifiability (standardised), movability and storage, ownership (IP or right to use), producibility/reproducibility, and marketability/tradability using an MRP.

And fourthly, in a digital world, the tax system (both domestic and international) has to be end-to-end digital, i.e., be able to track transactions, levy a clear single tax, and collect tax digitally—including taxes on international online transactions.

There is progress on the fourth issue in different quarters, but the government needs to move fast on the first three measures in order to align the tax system with the digital economy. This can not only solve existing taxation issues in the most transparent manner, but also provide future-proof solutions and establish standards for the support of innovation and progress.

Contributed by Mohandas Pai, Aarin Capital & Sudhir Singh, iSPIRT

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Reactions from #iSPIRT to the Union Budget presentation

iSPIRT is happy to note the Union Finance Minister, Mr. Arun Jaitley’s thrust in the direction of boosting the digital infrastructure in the country with specific reference to the Aadhar.

Aadhar powered by India Stack will allow people to offer presence less, cashless paperless service delivery to millions. Also digital literacy will also provide a big impetus in the rural areas.

The second initiative of iSPIRT which has been positively impacted by the Union budget is the ease of doing business in India and therefore the incentive for companies to Stay-In-India through the capital gains incentives where there will be no capital gains tax applicable if the funds so received are invested in a notified fund of funds by individuals in specific start-ups. The other major step is the decision to tax the Royalty Income from Patents developed and filed in India at only 10%, this we believe will certainly encourage companies to file more IPR in the country.

That said, we are disappointed with no attention being given to easing taxation norms of software companies where there is significant friction, the confusion on “goods” verses “service” tax on online downloads, TDS on sale of Software products and competition from foreign selling B2C products without any tax in India.

iSPIRT continues to work closely with the Government of India to enable the software product companies and start-ups to make the next leap with incentives from the Government. The Union Budget just presented is semi-sweet with specific sops being given to the start-up community in continuation of earlier policy announcements made by the Prime Minister Mr. Narendra Modi. There is a lot more that could be done to incentivize innovation and specifically ease the TDS conundrum which start-up and product companies find themselves adversely caught in.

Here are some specific comments from the iSPIRT team:

According to Mohandas Pai, Advisor, iSPIRT, “The Government continues to incentivize the start-up ecosystem as we have seen in the recent budget pronouncement. I am glad that the Government clearly recognizes that start-ups can be powerful problem solvers for the myriad issues facing the country and in turn generate employment as well. The Government’s decision to allow for 100% deduction of profits for 3 out of 5 years between April 2016 and March 2019 is certainly a welcome step that will boost start-ups.”

“While there are no major sops announced for the software product industry, the Government must understand that incentives to this segment of the industry will result in an exponential leap in exports and place India in an unshakable position on the world software product stage. That said, the decision to tax the Royalty Income from Patents developed and filed in India at only 10%  is a good move by the Government and will certainly encourage companies to develop and file more IPR in the country ,“ says Vishnu Dusad, Co-Founder & Governing Council member of iSPIRT & MD, Nucleus Software Exports Ltd.

Sharad Sharma Co-Founder & Governing Council member of iSPIRT says, “Start-ups in the country will certainly benefit from the budget announcement of amending the Companies Act to announce easier and swifter registration of companies. Another positive announcement from the budget speech by Mr. Arun Jaitley has been the focus on Aadhar for subsidy delivery. The Aadhar powered India stack from authentication to exection, coupled with the open API policy in India, can certainly transform the way in which digitally focused companies can reach the masses quicker and more effectively.”

Says Jay Pullur, Governing Council member of iSPIRT & CEO & Founder of Pramati Technologies.“The Government through the Union Budget has done well to do away with capital gains taxation if the funds so received are invested in a notified fund of funds or in specific start-ups. Of course, a lot more can be done to ease working norms for the software industry by looking into issues like dividends from overseas subsidiaries and a clearer and unambiguous definition of digital goods and digital services from a taxation point of view.”

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India innovated and celebrated @Inno_fest #IndiaCanInnovate

With whatever little humility we can garner, we created a platform for showcasing, inspiring, and celebrating innovation in India – in less than 27 days!!

20931485302_e541c3daaf_bWith the awesome support from our partners, sponsors, believers, dreamers, creators, speakers, patrons, volunteers and each and every one who was a part of InnoFest – we rocked it J

You asked us – Why the focus on Innovation?

Well, the trigger for this innovating idea was a little report that caught our eye. Our entrepreneurship deficit has grown while our innovation deficit is slipping. If we don’t build our innovation capability, two things will happen. First, we will not be able to solve the myriad problems that are specific to India. Second, our current national winners like Flipkart and Ola might lose out to their global competitors over time.

And how do we address the Innovation deficit?

There is no shortage of imagination and creativity in India. We need to build our skills where this imagination and creativity is applied to generate unique solutions to local problems. To give innovation scale – to make it grow; to inspire young minds to innovate…

Sharad Sharma, Co-Founder of iSPIRT and Co-Convenor of Innofest, said that “If companies can innovate and transform their functioning and performance radically, why can’t countries? The idea of Innofest is to distil the best ideas in enterprise and inspire individuals, corporates and Government organizations to take innovation to the common man. We are delighted that the Government has stepped in, in a big way to enable this transformation and this cooperation between public bodies and private enterprises will lay the foundation for radical transformation in the country.”

And… we were pleasantly shocked (that is not a phrase, I know :).

From robots and cars to 3D chocolates: we saw it all !!! (Click here for the complete array of displays that were a part of innovation).

Innofest was a phenomenal success. We reached the message via TV (CNBC Awaaz), RadioCity, Hoardings, and most importantly social media to over half a million individuals across the country. Over 1200 participants attended Innofest and immersed themselves into activities like maker-space, experience zone, young innovator’s zone, etc. The team curated and showcased over 75+ innovations from across India that ranged from an 11-year boy who had developed a mobile charger to Team Indus who are building a spacecraft that will go to the moon. The main session with our patrons – Nandan Nilekani, Mohandas Pai, Jayant Sinha, and Kiran Mazumdar Shaw was a huge hit with some of the most inspiring speeches one could experience(Videos shared below). Of course, Minister Babul Supriyo’s singing and dancing was just the finale that Innofest deserved.

A team of 10 committed and highly enthused volunteers – spread across 5 Indian cities – worked remotely and delivered Innofest 2015. And how…

The craziness of schedules, deadlines, and record turn-around times was exhausting yet exhilarating to the core… From media, sponsorships and venue discussions to the unlikely innovations that we experienced – it was indeed an unforgettable experience for each one of us.

And not surprisingly, we have been flooded with requests from all parts of the country – from individuals/companies/cities, offering to host the next Innofest – and it feels good and satisfying …

20948742491_2e3fe98f8e_bWhile we go about thinking what to do – this is a call for volunteers for our next. We anticipate it to only get bigger and better and we will need all the help that we can… because we cannot create this magic without YOU.

Do let us know how you can help us. Think.Innovate.

#IndiaCanInnovate.

Just let us know 🙂

Guest Post contributed by Ritika Singh, Proud Volunteer for Innofest

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Here’s how India’s “Product Nation” ambition be achieved and what the Budget can do for that ambition

The Next Google, Made in India

If you look at the Indian business landscape, you will see several successful services companies in fields like airlines (e.g. Jet, Indigo), health care (e.g. Apollo, Manipal), mobile phone services (e.g. Idea, Airtel) and IT Services (e.g. TCS, Infosys). Many of these companies are comparable to global peers, if not potential world beaters. What we don’t have are the corresponding product companies. We don’t have an aircraft maker like Boeing, a pharma company like Pfizer, a network equipment company like Cisco, or a software product company like Microsoft.

Is this is a problem? Yes. Because Boeing and Airbus alone generate almost as much profit as all global airlines put together. Pfizer’s profits are more than the profits of top 100 hospitals in US. Cisco’s profits are more than those of all European mobile operators. Microsoft generates more profit that the profits of top 20 pure-play global IT Services firms. Take a moment to digest that and it becomes clear that if India remains bereft of product companies, it won’t be a sustainable economy in the future.

Backdrop-10by11(all-english-style)-v2

Building product companies is hard, to be sure. Despite the fanfare, Tata Motors’ Nano has failed. And, sadly, Bajaj has been humbled by Honda in the last two years. In high-tech, Ittiam, despite its success in developing core intellectual property in online video, hasn’t broken into the main league. And, with our borders open to global competition, is it too far fetched to imagine that in a few years Amazon would have pipped Flipkart and Uber, not Ola, would rule our roads? We may have Indian players serving our digital consumers, but most categories might be dominated by foreign companies. Google already owns our search, Skype owns voice messaging, Facebook owns social media.

Is India destined to lose all these battles? Maybe not! But if we have to win, we have to embrace a new gameplan. Products, especially software products, are a winner-take-all business. Either you win or you are a nobody. Its not a place for the faint hearted.

In fact, tentativeness translates into a loss. It leads to sub-critical investments. We are staring at a costly example of this in the nuclear reactor industry right now. India can build 700 MW reactors. But economies of scale now kick-in at 1600 MW. Since we didn’t invest enough in the last 20 years (despite a wonderful start that Homi Bhabha gave us in 1950s), we are not a player in this large-reactor segment. So we will spend more on buying these bigger reactors from France, Russia and US in the next three years than what we have spent on our entire nuclear industry in the past 50 years! This is a really expensive failure.

If this was a one-off case it would still be okay. It is unfortunately not. In telecom, despite CDOT, CDAC and Sam Pitroda, we have only created one Tejas Networks, a nifty networking start-up from Bangalore. But, guess what? Tejas gets a pidly 1% of the annual telecom capex buys in the country. Rest is imported. We have a big rail network but no rail equipment companies. We are a generic drugs superpower but limp when it comes to new drug discoveries. These failures to create product winners don’t even faze us. We pretend it doesn’t matter.

We don’t even introspect why this is the case. When one sets out to create the world’s best hospital, airline or IT Services company, one builds in layers over years. But building a world class product company needs a different mindset. You have go all-in and bet-the-company on market or technology shift that is underway. This mindset is new to us in India. Our success in building services companies comes in the way. We have to accept this Provenance Effect; it is subtle yet significant.

To be sure, we are not the only victims of this effect. Taiwan is a victim of this too. It isn’t a player in mobile phones, ironically, because its design services legacy holds it back. Venezuela is not able to crack the chocolate market. El Ray owns the high end cocoa market, a key raw ingredient in chocolate, but comes up a cropper in high chocolates. If you ask the Belgians or Swiss, they tell you that they are a chocolate nation because they don’t have the cocoa mindset. Lack of a services industry legacy helps not just Korea but also Estonia (created Skype) and Finland (land of Nokia and Angry Bird games). It turns out that mindset matters — big time!

We have to jettison two ideas that hold us back from becoming a Product Nation! The first one is rather simple. We have to accept that no matter how well-run Indigo Airlines is it’ll not become a Embraer or Boeing. Similarly, a Narayana Hrudayalaya hospital will never bring a drug to market like a Pfizer does. Airtel or Verizon will never build a router like Cisco or Juniper do. And TCS will never be a Microsoft. Acknowledging this plain reality is the first step that we must take.

Then, we must discard our mentality of unbridled greed and reluctance to make bets — best showcased in our penchant for large Olympics contingents. Nobody cares about how many athletes you send to a sports competition, they only care about the number of medals you won. To improve odds of winning, small focussed efforts produce better results than grandiose schemes. Today, we have four times more new startups than Israel for one-sixth the outcomes. One reason is that the ecosystem enablers are narrowly sector focussed in Israel. The accelerators that help medical device companies don’t work with cyber-security start-ups there. Can’t we have a sector-focussed approach in India aiming at solar energy or medical devices, to name just two promising areas to bet on? If someone needs proof of concept: look at our performance in badminton and wrestling in India in recent years. The enablers in these sports are game-specific. Anything that smells like a generic “startup” program will have a low impact. It quite likely to be a scam!

Software product entrepreneurs when they are successful make a big economic impact in this winner-take-all world. So they are being courted worldwide. US is trying to get the Startup Visas in place for them. Canada already has a working program. Singapore has startup tax exemption. UK is in the game too. In our last budget there was a tantalizing line about “a special focus on software product startups”. Nine months have passed and nothing material has happened yet. Maybe this new budget will bring some well thought-out policies to light. This year 75% of newly funded software product startups will redomicile themselves in Singapore or US (up from 54% last year).

It is time for India to wake up to our Product Nation imperative. It is an opportunity for the NDA government to write history again. In 1998, they introduced a 108 point policy for IT services and we have the benefits around us to see. Now, they must do the same for software products. For the first time in modern India’s history, we have a chance to create world-winning products from India. The decisions we take today to support our flight to become a Product Nation will decide whether tomorrow’s Google, Viagra,Facebook, or Uber come from our nation. Act now.

Jointly written by Mohandas Pai & Sharad Sharma for Economic Times. 

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Early Stage Start-up? Your Chance to Get Market-Ready and Mentored by the Best Brains in the Business!

After a successful launch in 2013, TiE Bangalore’s AnthahPrerana is back with a bang!  It is not another business plan competition.  Think of it as an idea booster.  We pick the 10 best unfunded startups in commercial and social sectors, mentor them and get them market ready for exponential growth.

Last year, the who’s who of the Indian start-up ecosystem like Mohandas Pai, K. Ganesh, Krishnakumar Natarajan and Ashish Gupta picked the most promising ideas that TiE Bangalore began nurturing.  Out of the 10 winners from last year, 2 have already gotten funding: Tourlandish was accepted into the Dreamit Ventures incubator in NYC and TouchStone Equities invested in Channelyst.

AnthahPrerana Website imageThis year, we are partnering with Let’s Venture and IIM, Bangalore to deliver personalized help to our winners!  We have assembled another high-powered jury comprising of acclaimed IIM, Bangalore faculty, successful serial entrepreneurs and start-up experts at TiE Bangalore to select and mentor a new batch of start-ups.

Selection Criteria:

  • 0-3 years old companies
  • No angel or VC funding
  • Financially viable, for-profit ideas

What Do We Offer? (All for FREE!)

  • Showcase your idea to investors and start-ups gurus on Grand Gala Recognition night
  • Get highlighted on the extensive angel investor platform of our partner Let’s Venture
  • 2-day ‘boot camp’ with renowned mentors at our partner IIM, Bangalore’s campus
  • Automatic entry into our 90-day TiE-Turbo program with the best mentors in town

Key Dates:

  • October 31st, 2014: Deadline for applications (Apply now!)
  • November 27th, 2014: Announcement of winners
  • December 5th, 2014: Grand Gala Recognition night
  • January, 2015: 2-day boot camp at IIM, Bangalore
  • February – April 2015: TiE-Turbo mentorship program

Guest Post by Kunal Kashyap, TiE Banglaore