The Indian government plans on abolishing taxes being placed on the seed funding of startups provided by Indian angel investors in the forthcoming Union Budget. This is according to the government’s ‘Startup India, Stand Up, India’ programme, aimed at helping domestic investors finance early-stage ventures.
The current tax provision looks at funds provided by domestic angel investors as startup income, taking away about 30 percent of a startup’s cash flow investment. This makes India the only nation in the world that penalizes domestic investors in this way, which is one of the main reasons why about 90 percent of Indian startups get funded by foreign angel and venture capital investors.
The government has decided to resolve several regulatory issues which have been preventing startups from easily accessing funds, and forcing them to look for foreign funding. The tax, which only applies to local investors and is the same as being taxed twice, has been a major deterrent to the funding of domestic startups.
R. Chandrasekhar, president of Nasscom, a non-profit IT organization, said that scrapping the seed funding tax is not a privilege for startups, but rather a move to ensure equality. Chandrasekhar noted that angel investing is typically risky, and it is only fair if the government taxes profits, but not seed capital. The taxation and other difficulties that startups face doing business in India are some of the factors that force ventures to move out of the country to places like Singapore. About 65 percent of successful startups that were founded in India have relocated to other countries.
Both the Confederation of Indian Industry (CII) and Nasscom have termed taxing of high-net worth angels’ income and angel investments as a big obstacle for the government’s initiative to establish a friendly business environment for startups.
Estimates released by the Start Up India programme officials show about $9 billion was invested in Indian startups in 2015. One of the officials said that it is possible to fix the issue of angel investment taxation in the budget, but he was not sure if angel income tax can also be settled quite as soon.
Stakeholders in the startup industry have welcomed the government’s move, and are urging it to create a legal framework that promotes diversity and inclusivity. This will improve entrepreneurship and add value to the country’s investments, as well as prevent outflow of profit and taxes to other countries.