Challenges Faced by the Startups in India - Background Context
The report compiled and released 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 enterprises, 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 the ear 2012 during the Union Budget (by then finance minister Mr. Pranab Mukherjee). The purpose was to curb money laundering practices.
The devil’s advocate, Angel Tax is a treacherous attempt of Govt. toward Entrepreneurs and startups. Angle tax is a tax payable on the fund raised by unlisted companies from the Angel investors, via issuance of the shares in return for the funding.
This unholy and unwelcomed tax takes away the attention of entrepreneurs from businesses and the development of intended products and services. Instead, entrepreneurs are observed responding and replying to the tax notices. It is very clear the startups and entrepreneurs are clueless about these tax notices and appeals.
Angel Tax continued its journey of creating nuisance among startups and served as the primary reason to irk and pain in the neck for entrepreneurs. While calculating the tax, the authorities or tax officials treat funds secured (capital raised) from Angel investors as income from another source (which is heavily taxable and attracts penalties) for startups. This is very annoying and thus most entrepreneurs prefer to initiate their startups in other countries and take advantage of the ecosystems made available there.
The several occurrences of retaliation from a number of startups for receiving 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
In 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 crores and requires 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 the Angel Tax
- No proper way to identify the “Fair Market value” of the newly set up startup.
- Investors invest higher funds into “Innovative ideas”, at the 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 a 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 conditions. However, there are several aspects related to the startup industry that need rectification and attention to make Angel investment more feasible.