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The banks that have lend thousands of crores to the Mallyas and Ruias of India are persuaded to take a ‘haircut’ to their dues whereas the Angel Investors are attempted to be browbeaten by, as some have begun to call it, tax terrorism by tax administration. There is a tax, popularly known as Angel Tax, on funding the startups. Angel Tax is a term used to refer to the income tax payable on capital raised by unlisted companies via issue of shares where the share price is seen in excess of the fair market value of the shares sold. The excess realisation is treated as income and taxed accordingly. The tax was introduced in 2012 to arrest laundering of funds. It has come to be called Angel Tax as it largely impacts angel investments in startups. In a recent survey among 2500 Start Ups, 73% have received atleast one notice so far and 30% have got atleast 3 such notices!
Among the easiest ways to throttle innovation and enterprise is to let a ‘babu’ put a fair market value to it. Surely, there will be some misuse. But suspecting everyone in the ecosystem of entrepreneurs and innovators is not fair really. It is simply a bad idea to burn the entire jungle to kill one man-eater tiger. There were over 44.70 million MSMEs in India as per the 2011-12 census.
By launching Startup India, Skill India, Digital India and over 50 other schemes to back Start Ups, the political leadership seems to have done its job in recent years. It seems that the bureaucracy needs to get its act together better on this.
Not all is lost though. The new SEBI guidelines should make the IPO dream a reality for Start Ups. The relaxations in norms under Innovators Growth Platform (IGP) does make it easier than before to access growth funding for Start Ups. As T V Mohandas Pai, co-founder of Aarin Capital, recently mentioned, “IGP offers huge scope for companies on the fast trajectory, as funds are flowing into Indian stock markets and investors are looking for stocks with high growth potential.”
Capital is the blood that keeps Start Ups up and going. Banks don’t fund them easily because they cannot provide any collateral. There is always a tug-of-war on valuations when they approach Private Equity funds. The father-in-law and other loved ones never seem to have enough money to support a Start Up’s dream. It is only at the stock market where, due to risk reward correlation, there is always someone to invest in your dream. It is a long process though.
Easier than that are the angel investors, who despite knowing the risk fully, do back these dreams with their own money. They need to be encouraged. Not taxed additionally.
What is also needed is an innovation to recover over Rs. 10 lakh crore of public money from India’s top 500 defaulters. Not a haircut.