Budget 2019: These are the expectations of the venture capital industry and startups

The government has its compulsions and it may not go away permanently. But then it definitely should not result into the set of issues that virtually expose startups to existential crisis. There is a win-win for sure and they could be considering the following approach:

Companies in which accredited angel networks and/or VCs and/or FDI rules compliant investors have invested: Such companies should be out of the scope of angel tax. Today, the capital invested by accredited Alternative Investment Funds (AIFs) and FDI are exempt from Angel tax. The government should make a provision that at the time of completing the assessment if the company has managed to get the funding from such AIFs and / or through FDI would be exempt from the tax.

Companies other than the above: There needs to be a provision that in case of companies that don’t have AIFs and / or FDI, the income tax officer should be entitled to verify the tax filed income and once the investing credentials of the investing person/entity are established and the Assessing Officer is able to get PAN and returns of such investors online, there shouldn’t be demand of angle tax on the amount, that the said company that has received capital from such investors.

The government should make sure that startup funds and investors have level playing field with other asset classes, more particularly listed companies.  Whilst today the timeline for considering a stock as ‘long term capital asset’ (which in turn results in lower tax rate at 20 percent) is 24 months, for rate of long term capital gains for such unlisted companies ends up at 20 percent. On the other hand, the tax rate for listed companies is provided for at 10 percent.  There needs to be a parity between listed companies taxation as well as unlisted companies at both levels;

Rate of tax for both listed as well as unlisted companies should be 10 percent.

Duration it takes for shares to be counted as long term capital gains for unlisted shares should be 12 months ideally. If this is kept at 24 months, this doesn’t hurt much but principally if the new economy has been start up and technology companies led, then there should be an acceptance that start ups is the way to promote these and once you conclude that, it makes complete sense for duration to be 12 months for both listed as well as unlisted companies.

The organised form of investing in startups and promoting their growth is by ensuring that the investors (both local as well as overseas) in startups have clear incentives  to invest in startup funds.  Solving for the above will partly do the trick. On top of it, there needs to be a separate tax regime for tax on start up funds. Historically, startup funds are taxed with a ‘pass through mechanism’ where the investors pay tax in their own name, each time the shares in companies are sold. The gains in the hands of the funds are passed through seamlessly in the hands of investors of the funds and in turn, the investors get assessed for taxes in their hands. This treatment often leads to a situation wherein the investors have invested Rs 1 crore in a fund of Rs 100 crore (Say) and have to start paying taxes the moment the first company is sold profitably. So if the tax attributable to the investor is Rs 10 lakhs, the investor pays the tax even though he has not made gain on the full original investment of Rs 1 crore but ends up paying tax out of his pocket at times. This treatment needs to be altered and taxes should be payable by investors of funds only in the scenario that the fund is able to return the quantum of gains that are in excess of the original investment.