PEs, VCs Get Tax Breather for Startups

Income from transfer of unlisted shares to be treated as capital gains & not as biz income even on transfer of control or mgmt
Private equity (PE) and venture capital (VC) funds investing in startups have got a tax relief. Income from transfer of unlisted shares by them would now be treated as capital gains and not as business income even if there is transfer of control or a management change.A number of funds had received show cause notices from income-tax authorities on this issue, prompting a spate of representations from them as well as startups to the Central Board of Direct Taxes (CBDT).

The relief is available to Sebi-registered Alternate Investment Fund (AIF), both category I and II.

The board has now sent out a letter to the field saying this change in control or management should not be applied in case of such investments as AIFs typically invest in unlisted shares of ventures, many of which are startups, making some form of `control and management of underlying business’ necessary .

This issue had its origin in the long-standing debate on treatment of transfer of shares as business income or capital gains.

The CBDT had in February 2016 through a clarification settled the debate that income from transfer of listed shares and securities which are held for more than a year would be taxed under the head ‘Capital Gain’ unless the taxpayer himself treats these as stock-in-trade and transfer thereof as its business income.

For determining the tax-treatment of income from transfer of unlisted shares for which no formal market exists for trading, the CBDT said the income would be considered as ‘Capital Gain’, irrespective of period of holding, but with some exceptions.

These included a situation when genuineness of transactions in unlisted shares itself was in question, transfer of unlisted shares was related to an issue pertaining to lifting of corporate veil or the transfer of unlisted shares is made along with the control and management of under lying business.

The board has now dropped this condition that impacted startup investments by VCs and PEs as their funding usually implies some form of management control.

Tax experts say the CBDT clarification helps remove any uncertainty and risk that gains from sale of shares in such cases could be taxed as business income.

“Taxing them as business income would have been a big blow since they invest for a longer duration and would have lost out on indexation benefit or full capital gains exemption (in cases of favourable treaty countries like Mauritius, Singapo re, the Netherlands, etc),” said Amit Maheswari, partner at Ashok Maheshwari & Associates LLP.

“The clarification addresses the concern and ambiguity caused by the exception to the broad principle laid out by the earlier guidance issued by the government that income arising from transfer of unlisted shares should be considered as capital gains,” Vikas Vasal, national leader ­ tax, Grant Thornton India LLP .

Tax experts have now sought further certainty in the Budget.

“It is common for AIFs to acquire management control of the investee companies… This is a very important clarification also considering that business income does not get pass through status. Investors in such AIFs can therefore get the benefit of lower tax rate on capital gains,” said Rajesh Gandhi, partner, Deloitte Haskins & Sells LLP. “The Budget 2017 should in fact remove the differential tax treatment between capital gains and business income and simply give pass through status to all types of income of AIFs,” he said.

Source : The Economic Times (Mumbai)

Taxed Angels Set to Form United Front

Industry and investor bodies come together to submit list to DIPP
Angel investor networks and startup industry bodies have come together to form a unified startup coalition, seeking the removal of the “angel tax” through recommendations to the department of industrial policy and promotion (DIPP).There is a growing concern after the income tax department ordered about 100 startups to pay tax on their marked down valuations in recent funding rounds in November and December last year. ET had on January 4 reported that most of these startups are looking to challenge these tax orders.

The startup coalition, which in cludes Nasscom, Indian Angel Network, Mumbai Angels, IVCA and TiE, has asked the DIPP to carve out angel investor groups while defining such networks and creating specific norms for such investments to exempt them from the angel tax including retrospective exemption.

“For investors, taxing at fair value is collateral damage. We are the only country to tax angel investments,“ said Saurabh Srivastava, cofounder of IAN.

The tax demands have been made for the assessment years 201314 and 2014-15. Experts believe that Section 56(2)(vii)(b) of the Income-Tax Act, 1961, under which these notices have been sent, was originally introduced to curb money laundering and is now being levied on startups.

“This (slapping of tax notices) is due to past actual cases where the tax department has deducted fraudulent transactions, but it is unfortunate that this rule has several unintended consequences on legitimate investments in the startup investing community,“ said Gopal Srinivasan, chairman of TVS Capital Fund.

Investors believe that there should be a level-playing field for both publicly listed as well as unlisted entities, in this case, startups -with a government body such as the DIPP recognising angel network groups in India, similar to VC funds registered with Sebi.

Apart from converting disallowed capital investment to inco me, experts feel that the tax levied further stresses the cashflow of the startup resulting in the company raising further rounds at an even lower valuation.

The Central Board of Direct Taxes (CBDT) had on June 14, last year, issued a clarification exempting government-registered startups from the tax.

In several cases, however, the tax demand has been made in earlier years.

Industry trackers say that some of the startups may consider moving their base outside India if clarity is not provided. “Re-domiciling will only increase with this. I would recommend (that startups) leave India and re-domicile outside if they are further pained. We have worked to keep startups in India but moves like this make us helpless and frustrated,“ tech investor TV Mohandas Pai told ET in an emailed response.

Source : The Economic Times (Delhi)

HOW I GOT MY STARTUP IDEA

AT SCHOOL, WE OFTEN DON’T KNOW OUR REAL APTITUDE

The company:

Vidyartha The idea: An online platform to help build academic profiles of students through data-insights and aptitude tests

How it struck:

Indian School of Business alumnus Priya Mohan was a financial auditor. In her role, she interacted with entrepreneurs, helping many to raise funds. “Their train of thought excited me,“ she says. Inspired, she debated on a few ideas for herself and chose education. “I took science in school. But I felt if I had access to data about my skills, I would have tried something else.“

When it started:

March 2011

How it started:

In late 2010, Mohan teamed up with her husband’s friend Navin Balan to start Vidyartha. They spent six months chalking out a business plan. “We spent a lot of time in Domino’s and coffee shops.“ The big break came when a Hyderabad-based school decided to partner them in 2011.

Now:

Vidyartha partners with over 2,000 schools and has created profiles for over 2 lakh students. CBSE has asked it to develop online aptitude tests.

WE FOUND SCHOOLS WERE NOT FOCUSING ON CONCEPTS

The company:

3Dexter The idea: Experiential learning by integrating 3D printing tech with school curriculum

How it struck:

Raunak Singhi and his friends were sitting in a tuition centre when they noticed two students cramming definitions. “When we asked one for a definition, he gave us a thorough definition, but when we asked him the concept behind the definition, he couldn’t answer.“ Singhi started 3Dexter to enable students to understand concepts better.

When it started:

June 2015

How it started:

Singhi got together with six of his friends from school and they spent 6-7 months researching the idea. They did a threemonth trial in a Delhi school which ended in February 2016. In April, they went live.

Now:

3Dexter has tied up with several schools in Delhi, Gujarat and Mumbai and leading school boards. It recently received Rs 1 crore from Ica Edu Skills, a training organization.

The Times of India (Delhi)

Startups are getting into the business of death

Back in 2015, TOI reported about startups like Mokshshil and Kashimoksha.com, companies that tried to provide funeral services online. Now, it seems that the rest of the world is catching up. Take Cake, for example. While the name might sound like yet another online caterer, what Cake does is handle people’s legacies on the web such as tweets, Facebook posts, playlists and other artefacts of online existence. “Most people haven’t thought about what they would want to happen to their online accounts after they’ve passed away . We help people understand that there might be precious memories or even actual assets in their Dropbox, Gmail, Facebook, Instagram accounts, etc,“ she tells The Guardian. Then, there’s Farewill, a London based startup that makes it easier for people to make and update their wills online. Cardiff-based Kim Bird is attempting to bring transparency to the famously opaque ­ and expensive ­ funeral business with her company About the Funeral, founded in 2012. So is Derrick Grant, with his network of funeral directors called Willow.

“Users fill in a simple questionnaire and are directed to the provider who most closely matches their needs. The business makes money through the sale of funeral products such as coffins, flowers and celebrant services. Grant says people often pay large sums for these and it is easy to undercut his competition. He believes he is also making the process easier,“ reports Jon Card at The Guardian.

Across the Atlantic, startups dealing with death are taking off as well. With 2.6 billion people dying annually in the US, it is a big business, after all, and startups want their share. As baby boomers become more comfortable shopping online, these startups are finding a highly engaged audience. And those in their 20s and 30s, hitting major life events like marriage, the birth of a child or the loss of a parent, also require planning services. There are the basic services, such as those offered by Los Angeles based Parting, which allows users to search for funeral homes by entering a zip code and compare service rates. Another startup in Los Angeles, Grace, is tackling all of the issues that can overwhelm family members coping with grief after the death of a loved one. “Like what are the 60 things I need to do in the next three months? At Grace we say, `Here are the 17 things you need to do this week’ and you can check them off as you do them. Here’s what you do the week before someone dies, when they die and then two weeks later,“ says Alex Kruger, the company’s co-founder.

And ultimately, the idea is that these startups will help people decide what needs to be done after death ­ whether their bodies be given over to science, or disposed of in an environmentally friendly manner and so on. And with greater transparency, maybe even the prohibitory costs of a funeral will come down.

Source : The Times of India (Delhi)

3% of workforce drives growth for most cos

India Inc Strives To Ensure Right Coaching For Top Performers To Spread Achiever’s Spirit
Do super-achievers in your company have a snowball effect? The out performers may be instrumental in driving growth, but may have failed to inspire others.It’s this 3% of high-potential group of achievers that companies reward for their exceptional performance. The worry now in India Inc is whether this segment is getting the right kind of coaching to help spread the achiever’s spirit.From encouraging competition to spurring growth, organisations are now looking at cooperation as a better tool to convert ordinary workers into extraordinary , and achievers into super-achievers.

Anand David, founder, Manford, a corporate training specialist, calls it the 3% theory. Manford believes strategy can play a key role in training and ensuring that people become exceptional in what they do. “If you take any organisation, it’s a very small number of people, say 3%, who drive the way it thinks and behaves. They are the primary movers and shakers, giving both character and shape to the organisation. Shouldn’t we then be focusing on their unique needs, so that they in turn are able to responsibly lead and impact others? In fact, this 3% can be at any level, even line-1 managers, who could then be identified and fasttracked through intense, expert coaching,” said David.

After adopting such a strategy for the Indian subcontinent, Avery Dennison, a global leader in labelling and packaging materials and solutions, saw clear im provement in business results that were significantly better than planned. Following a workshop, a group of potential change leaders were identified for one-on-one executive coaching at Avery Dennison. Each trainee, along with the coach, identified actions on three to four streams needed to be more effective leaders.

The transition was from competing to co-opting and breaking down functional silos. It enhanced risk-taking with a changed mindset, moving from `cannot’ to `why not’.It improved accountability among employees and inculcated a language of speed and delivery and aggressiveness.

The trickle-down effect was noteworthy . Coaching sessions include an effort to align key managers in the organisation on language and behaviour. When key influencers talk the same language, it starts percolating down to the lowest levels.As collaboration improved with one common agenda versus multiple functional agenda, so did accountability.

Source : The Times of India (Delhi)

After Funding Winter, VCs may Venture out in 2017

Tech world has high hopes that 2017 will prove to be brighter, as highfliers prepare to go public & VCs amass huge new war chests
Investors who once poured money into the nation’s start-ups with abandon began to tighten their belts this year.The amount of money that flowed into start-ups in the United States fell in 2016 for the first time in four years as the number of deals struck tumbled to their lowest levels since 2011.

But the technology world has high hopes that 2017 will prove to be brighter, as the parent company of Snapchat and other highfliers prepare to go public and venture capitalists amass huge new war chests.About $67.8 billion was invested in start-ups in 2016, according to data from PitchBook, down 15 percent from last year. And just 7,841 deals were struck, down 25% from the period a year ago.

Much of 2016 proved to be a less ebullient time for the once redhot start-up market.

In years past, investors and the industry press alike delighted in anointing new “unicorns,“ the once-ballyhooed term for a start-up valued at more than $1 billion.

This year instead brought a healthy skepticism -while the apocalypse hasn’t arrived, leaner times are ahead.Start-ups have tightened their belts, laying off staff and focusing more on reaching profitability rather than skyrocketing user growth.

Just 12 companies joined the unicorn club, according to the data provider CB Insights, a 70% drop from 2015.

And initial public offerings -one of the pri mary ways that investors in start-ups can harvest their gains -tumbled sharply during 2016 amid uncertainty and tumult in the stock market.

Just 105 offerings priced during the year, according to data from Renaissance Capital, down 38% from 2015.

Those deals raised $18.8 billion, also a 38% drop from the year-ago period. Both hedge funds and big mutual funds, which have been among the most enthusiastic new backers of new private companies, continued to largely show reluctance in venture investing, according to CB Insights.

Moreover, a few of Silicon Valley’s most prominent start-ups suffered signifi cant blows in the past year.

Theranos, the once highly lauded blood-testing company, laid off about 40% of its workers and closed its labora tory operations amid heightened skepticism about its technology.

Zenefits, a business software start-up, replaced its chief executive after BuzzFeed News reported on its use of unlicensed health insurance brokers. Zenefits has since settled investigations with a number of states, and the company has sought to turn itself around.

Of course, heavyweight start-ups had little trouble raising money. Uber alone raised $3.5 billion from the Kingdom of Saudi Arabia, putting its cash hoard from outside investors at more than $11 billion. Lyft, Palantir and Snap, the parent of Snapchat, all raised enormous sums as well, as did big non-American start-ups like the Chinese ride-hailing service Didi Chuxing.

And some startups sold out to bigger companies for multibillion-dollar valuations.Jet.com, an e-commerce company that began selling goods only within the last two years, sold itself to Walmart for $3.3 billion.

Investors are betting 2017 will be better. Re naissance Capital poin ted out that the average total return of IPOs in 2016 reached 23%, a sharp reversal from the nega tive 2.1% return of 2015 offerings and surpassing the 21% return of two years ago. ­

Source : The Economic Times (Delhi)

Ratan Tata’s Startup Bets

Ratan Tata invested in as many as 29 startups in the past two years through March 2016. He took minority stakes in 22 companies in fiscal 2016, three times more than the previous year when he chose seven to bet on, according to Tracxn Technologies, a data analytics company.Eight of the prominent companies in the portfolio, including Paytm, Zivame, FirstCry and CarDekho, have reported combined revenue of `1,401 crore in the year to March 2016, more than double from the previous year, but their losses jumped three-and-half times to `2,191 crore. The previous year, they had incurred a combined loss of `612 crore on sales of `625 crore. This increased burn comes from extensive marketing investments, hiring and spending to enhance technology. Here’s a look at the financial performance of the companies he invested in his personal capacity.

The Economic Times (Delhi)