Challenges Faced by the Startups in India

Challenges Faced by the Startups in India - Background Context

Challenges Faced by the Startups in India

According to the report made and releases by the Citizen’s Engagement Forum, describes the difficulties faced by the Start-Ups in India. They surveyed around 15,000 startups, Small and Medium Enterprise and tons of Indian entrepreneurs.

Challenges of Startups

  • Alleged Corruption (Its native and Indian notion).
  • Inefficiencies and Unorganised Bureaucratic System.
  • Lack of Loan Availability.
  • Funding and Financing options.

What is this not so stupendous Angel Tax?

This tax was introduced in year 2012 during the Union Budget (by then finance minister Mr. Pranab Mukherjee). The purpose was to curb the money laundering practices.

The devil’s advocate, Angel Tax is treacherous attempt of Govt. towards Entrepreneurs and startups. Angle tax is tax payable on the fund raised by unlisted companies from the Angel investors, via issuance of the shares in return of the funding. This unholy and unwelcomed tax takes away the attention of entrepreneurs from businesses and development of intended product and services. Instead entrepreneurs are observed responding and replying to the tax notices. It is very clear the startups and entrepreneurs are clueless of these tax notices and appeals.

Angel Tax continued it journey of creating nuisance among startups and served as the primary reason to irk and pain in neck for entrepreneur. While calculating the tax, the authorities or tax officials treat funds secured (capital raised) from Angel investor as income from other source (which is heavily taxable and attracts penalties) for startups. This is very annoying and thus most of the entrepreneurs prefer to initiate their startups in other countries and take advantage of the eco systems made available there.

The several occurrences of the retaliation from number of startups for receive tax notices where startups levied 30% of the total funding raised (counted as the income of the company) grabbed the Govt. attention and they decided to intervene and appoint the committee panel to issue currently faced by the startups and angel investors.

Exemption from the Tax

April 2018, the Indian Government released the formal notification to enable exemption to startups (Section 56 - Income Tax Act) only if the total investment valuation, inclusive of finances received from Angel investors not exceed 10 crore and requiring approval from Govt. and valuation certificate from merchant bank. This is also only applicable, if the respective Angel Investor has a minimum net worth not less than INR 2.0 crores.

Demerits and Obstacles of Angel Tax

  • No proper way to identify the “Fair Market value” of the newly setup startup.
  • Investor invest higher funds into “Innovative ideas”, at early stages of the startups, thus it seems as profit to tax officials, but it’s not the profit.
  • The middle way is needed to identify the gap (justification for higher valuation of startups) between Govt. Tax officials and entrepreneurs.
  • The CBDT made a provision for relaxation of Angel Tax, for angel investors with certain terms and condition. However, there are several aspects related to startup industry that need rectification and attention to make Angel investment more feasible.

Important Links (External)

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