Angel Tax Notification: A Step In The Right Direction, But More Needs To Be Done

There have been some notifications which have come out last week, it is heartening to see that the government is trying to solve the matter. 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 (Section 56(2)(viib)) 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 income criteria of INR 50 lakhs and net worth requirement of INR 2 crores is again a move by the government that requires further consideration for the investing community. Therefore, to further encourage investments by Angels or to introduce new Angels to the ecosystem, there is a need to look towards a reduced income criterion of INR 20 Lakhs or a net worth of INR 1 crore, enabling more investors for a healthier funding environment. We also, need to build a mechanism to facilitate investments by corporates and trusts into the startups.

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:

  • Section 56(2)(viib) should not apply to any investment below Rs 10 crore received by a startup per year or increase the share premium limit to Rs 25 Crores, from Indian investors provided that the startup has the PAN of the investors
  • Section 56(2)(viib) 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, the government 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 the early resolution of these pending matters. For any suggestions, Do write to us [email protected]

The article is co-authored with Siddarth Pai, Policy Expert – iSPIRT Foundation and Founding Partner – 3one4 Capital.

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.

Innofest to Innonation

Evolving from a festival of innovation to a platform helping innovators to succeed…

Over the past 3 years, while volunteering for Innofest – the platform for hardware entrepreneurs – I realized two things:

  • Doing a hardware product in India is much tougher ….
  • … but there are several resources available across the country that can make it easier for hardware companies to succeed

What was needed is a way to connect those who need the assistance and advice to those who can help and are willing to help.

The goal of this group of 10-12 individuals who selflessly give their time in organising various initiatives and events under the Innofest umbrella is to make it easier for first-time entrepreneurs and to assist them in their journey. We deliberately chose to focus on startups and individuals who were using hardware and technology to solve meaningful problems. Because that is the most underserved section of the entrepreneurial eco-system.

The initial 2 years were invested in reaching out to hardware entrepreneurs and enablers who can assist them – maker spaces, companies, mentors, investors, etc., and bringing them together to interact with each other. As with many other sectors, in hardware led innovation too, resources were concentrated in 3-4 cities, while innovators were spread across the country. These innovators usually worked on their own, often spending time and energy and money on aspects that had already been solved by someone else. Getting together problem solvers and innovation enablers was a critical first step. And the community responded enthusiastically. Over 1800 innovators turned up at the inaugural in Bangalore. Since then we have taken the initiative to Hyderabad, Jaipur, Nagpur and other cities. In fact, Prathibha Sastry, the key volunteer driving Innofest took two ‘yatras’ – once driving from Bangalore to Delhi and once Bangalore to Assam – to find innovators in small towns and tier 2 cities across India.

What she unearthed was awe-inspiring – folks who were solving local problems with their frugal innovations. However, many of these enterprising folks did not consider themselves as entrepreneurs. For them, they were just using their ingenuity and creativity in addressing a problem that they or someone in their family or community faced. They were solving for Bharat. And that we feel is the real opportunity. To encourage these inspired, enterprising and creative problem solvers to get their innovations to solve problems at a much larger scale than they have currently envisaged. To help spread their innovations to places that can benefit from these innovations. I.e. find innovators and help them in their entrepreneurial journey.

To do that, it was important that we shift gears. And at Innofest, we have.

We now have extended the goals to not just curate and connect innovators and enablers, but to also undertake programs and initiatives that will increase the chances of success of these innovations. These include providing better access to resources like maker spaces, working with large corporates in helping drive their innovation programs, creating better access to capital and markets, creating a pool of mentors, etc.

Indeed, from being a festival or celebration of innovation, Innofest is now a platform for innovators to succeed in solving problems and making our country a better place. And hence, we have also taken the bold step to change our name from Innofest to Innonation, which means using innovation to improve the nation.

Whether you are an innovator, or want to volunteer, or a company that wants to support innovation or a co-working space or maker space, do connect with us at Innonation. We need a lot more people in making this volunteer-driven platform successful.

To get a ringside view of the innovation happening across India, join us at the flagship event in Bangalore on 26th August. If you are into solving a problem for Bharat, check the agenda to see what workshops and events are most relevant for you.

See you at Innonation. The country needs you to be there.

Prajakt Raut

Founder –  Applyifi

 

 

Startup India: What Can You Do?

At the Startup India event, our honourable PM shared that government’s impact is highest when it decides, intentionally, to stay away, and I agree with him. But we, as the citizens of India, can play a huge role. And we must.

But as a co-founder of NowFloats, a startup, here are some of my asks to you, my fellow citizens, and you may fall under multiple categories:

To Consumers: Sincerely, kindly adjust.

Like most of you, I have cursed Ola/Uber as much when the driver cannot read the GPS. Many of NowFloats’ over 200,000 customers escalate to me directly. All this is a part of the startup journey. We learn from this and hopefully act fast enough on it. So, please crib to us (speaking for all startups here), act obnoxious, throw a fit, expect the best-in-the-world quality, but don’t give up on us! Because we will fix things, once we get that next round of capital or find more efficient ways to train the drivers or the sales people.

To Enterprises: Startups are a feature, not a bug.

When a startup comes calling, please keep aside your desire to be an entrepreneur. That is a parallel process and highly encouraged, because it will make you adopt the new technology or product. If you are unable to do this, you may be unable to do that startup either (#harsh), where you are required to be a new person every single day (#think). So when a startup approaches you, it’s an opportunity to understand the latest technology, perhaps even get feedback on your own business plan. It’s not the time to feel left-out or ask questions that make you go ‘I could have done this so much better’. BTW, almost all startups are happy to discount their product (or even make it free), if you just agree to adopt (#hint).

To Investors: Stay true to your investment thesis and stage.

An angel investor is (and should be) very different from an institutional seed, and this should be very different from a Series A and so on. Only the wearer knows where the shoe pinches, and therefore only the stage-walla investor knows what the entrepreneur needs. Angels will typically give money based on trust and that’s all they should be bothered about. Blume Ventures (for example) is a seed stage investor and they understand their thesis and stage well. They don’t ask for monthly, 10-page reports from all companies but watch out for the ones who are sending these pro-actively. Their support and help is different for each and they will spend significant resources to deliver ‘personalized’ mentoring to each startup. This will not be the case at Series B, when the startup has its resources (now) to find (read pay) for external support. Our Series A investors, Omidyar Network, puts the next stage of pressure on us, helping us with higher growth and velocity.

To Government: Stay hungry, stay away.

In my opinion, the government has already done something that even they don’t realize it, yet! While some of the policy changes expected by startups remain open (refer my pre-event opinion in Mint & iSPIRT’s 34 point asks), but many were awesome starts. And by doing what the government did, they have unleashed a (wonderful) monster. They made the world (to borrow from them), stand-up and take note. This aircraft has taken off and it’s not landing anytime soon, supported by mid-air refuelling of new and relevant policies in future. Things will just have to happen given the velocity on the numbers and stuff we see every single day (see Digital Desh) (#no #choice).

To Family: Stay.

The real entrepreneurs are the families of entrepreneurs’, even though this was forced on them. To them I have to say only two things: Thank you and please stay the course. Pass or fail, this experience is going to change your family for generations. Just take my word, send your partner that home-made food (to save money and health) and… Stay! (#rockstars)

About Me

I am Jasminder Singh Gulati (@GulatiSinghJ), worked at global corporates for over 18 years, including 12 years at Microsoft before co-founding NowFloats in 2012 with Ronak Kumar Samantray, Nitin Jain, and Neeraj Sabharwal. NowFloats helps local businesses get a meaningful digital presence that connects the business with local consumers, resulting in higher revenue & profits. Over the past 3 years, NowFloats has over acquired over 200,000 customers (90% of them in India) and drives over 6M consumers to them every month. NowFloats has 6 patents, all ‘Made in India’.