The latest notification by the Department for Promotion of Industry and Internal Trade has put most of the early-stage startups out of the purview of the devil called the angel tax. But it came with some riders.
The government has redefined startups and relaxed norms on who can avail exemption from angel tax. An entity can now be termed a startup up to 10 years (up from 7 years) since the date of incorporation, provided it has not crossed Rs 100 crore in revenue in a single year. The limit was Rs 25 crore earlier. This is likely to cover most of the early-stage startups.
The limit for investment that will be exempt from the purview of angel tax has been increased from Rs 10 crore to Rs 25 crore. This makes sense, considering the fact that most of the initial rounds of funding don’t exceed that limit. However, it is not clear what happens when a company raises funds twice or thrice from multiple sources in a single year and the cumulative funding exceeds the Rs 25 crore limit.
The rule barring startups from investing in securities is going to hurt the entire ecosystem. As VCCircle pointed out in a report, most of them “temporarily park” raised funds in “debt mutual funds” until they need to use it. No company would require all the money raised in one go. But, investing them in any securities-linked instrument would debar them from availing angel tax exemption. Besides, there is no clarification on what would happen to the interest they might earn if they just put the funds in bank.
Interestingly, the latest notification did not say anything about the investor profile. If the earlier definition stays in force, then only people with more than Rs 50 lakh of annual income and net worth of Rs 2 crore will be eligible to invest. This is to restrict small investors, especially individuals. But the issue here is that most ventures start with investments or loans from friends and family members. This is one area that the Government needs to have a relook and liberalise it so that StartUpIndia Mission gets a boost and the country is in a position to become the incubation bed for innovative startups.
As the Economic Times reported, the latest notification would “force” startups to seek funds from venture capitals and formal angel groups and not wealthy individuals. The only respite, however, is that the Government has excluded investment from non-resident Indians as individuals, alternative investment funds (category I) and listed Indian companies with net worth of at least Rs 100 crore (or turnover of at least Rs 250 crore) from the angel tax net.
Also, the rule on restricting startups from owning vehicles exceeding Rs 10 lakh does not make much sense.
The concept of angel tax is based on Government’s aim to arrest money laundering. While there is no evidence that startup funding has been used as a channel for illegal activity linked to money from undisclosed sources, the Government has been quite determined to keep startup funding under check.
The reality is that startups get very limited funding from domestic sources. According to market estimates, just about 10 percent of around $38.5 billion funds that Indian startups got came from domestic sources. Liberalising startup funding can pave the way for higher economic growth.
The Government’s latest move on the issue of angel tax is a step forward, but the riders are unlikely to please the startup fraternity.