Govt may Give Startups I-T Wiggle Room

Mumbai:
Startups currently in the market for angel funding may soon not have to worry about the taxman or relocating overseas. The government is working towards a solution to ring-fence angel investments that are currently taxable under the Income Tax Act. The move, if pushed through before or in the upcoming Union Budget, would help accelerate the growth of the domestic angel investor community and stem the drain of startups and critical intellectual property to overseas locations such as Singapore, North America and the UK.“Startups create jobs and intellectual property and catalyse FDI (foreign direct investment) by attracting venture capital. Because of the current tax regime, star tups are being compelled to incorporate overseas,“ said Saurabh Srivastava, founding and managing committee member of Indian Angel Network (IAN), which is leading the recently constituted Association of Indian Angel Groups on discussions with the finance ministry on amending the rule.

The amendment under discussion seeks to exempt investments not exceeding ` . 10 crore from Section 56 (2) of the Income Tax Act, provided that such investments are made through registered angel groups.

Under the current rule, introduced in Finance Act 2012, capital raised by an unlisted company from any individual against an issue of shares in excess of fair market value would be taxable as `income from other sources’ under Sec 56 (2) of the I-T Act.

“Startups are now liable to pay a 33% tax on any invest ment they receive. In other words, if they need to raise `.2 crore, they will actually have . 3 crore. Hence, they to raise ` will have to dilute ownership by 50% more than they normally would have,“ said Srivastava.

The introduction of the socalled `angel tax’ in the Finance Act 2012 unleashed a backlash from the startup and angel investor community . In June 2013, Sebi formulated rules that would recognise angel funds as a sub-category with a smaller corpus requirement under the Sebi AIF (Alternative Investment Funds) Regulations 2012. Thus, capital raised by startups from Sebi-registered angel funds in approved investee companies, even if above fair market value, would not be taxable.

However, this implies that organised angel groups such as IAN and Mumbai Angels would have to create funds.Currently they just aggregate individual investors and, in each deal, these investors directly invest from their own capital pool and are issued shares in the investee company individually.

The amendments under discussion, if taken on board, would directly benefit organised angel investor networks such as IAN, Mumbai Angels and Hyderabad Angels. IAN is currently the largest organised angel investor network with 350-odd members and more than 60 investments till date. In 2014, such networks, along with high-profile individual angels such as Google India chief Rajan Anandan, iSprit founder Sharad Sharma and AppLabs founder Sashi Reddi, pumped in $115 million into 285 startups, according to data from VCCEdge. This, however, is minuscule compared with the late-stage capital that venture capitalists invested, closing off 2014 with $2.1 billion.

Source : ET

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Author:

Neeraj; an entrepreneur & a visionary in the field of Railway, Defense & Automobiles, is a graduate in commerce and a Harvard Business School Alumni. He’s an expert in govt. liasoning & contracting and has an exceptional network & connections at both local as well as global level. He’s an expert in Market Strategy & Planning and has served number of overseas companies as an advisor/consultant. He takes a profound interest in upcoming startups & is very receptive towards ground-breaking ideas & innovations. He likes to brainstorm those ideas and if the values & philosophies matches; he is even ready to invest his resources, serve as a mentor or act as an incubator to futuristic businesses.

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