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Journalism of Courage
When Union Finance Minister Nirmala Sitharaman announced the abolition of the Angel Tax — the income tax that is levied when an unlisted company issues shares to an investor at a price higher than its fair market value — Mahesh Murthy, a venture capital investor, had one response: “Too little and too late”.
“Angel investment happens when people see a reasonable chance of getting outsize returns once their basic personal investments in equity and mutual funds are taken care of. The nature of startup investing is that no one values a startup at ‘fair market value’. These values approach fair market prices when the startup lists or is acquired,” he said.
Murthy, who has invested in at least four Pune-based startups, added that till now, Angel Tax made the entire prospect of investing in startups unattractive both for investors and for the founders. “No founder wants his startup valued at a low price where someone with even Rs 50 lakh can own 50 per cent of the company. So, they want starting valuations where they can dilute as little as 5 per cent or so for Rs 1 crore or so, implying a valuation of Rs 20 crore or more. No Angel wants to invest in such a startup as he has to pay tax on the valuation that is higher than the fair market value,” he said.
According to Murthy, the result was that overseas funds and angels came in and became the preferred investors for a new generation of startups. “The Indian angel industry has been in a bit of doldrums with investors finding it easier for instance to invest in overseas startups than Indian ones. The tax has been removed after a decade.”
He further said, “Today’s angels have to now see how this asset fits with their needs. Inflation is high, at 7 per cent +; FDs and savings accounts give much less. Only equity and mutual funds offer higher returns. But a depreciation of the rupee to the dollar of 4 per cent makes calculations more complex. Today, Indians know their money has to grow at 12 per cent or more per annum even to stay on par with inflation and dollar appreciation. Most money is going to mutual funds and equity to chase that 12 per cent plus the survival mark. That too is pre-tax. Angel funds may find favour only if investors believe they can get significantly more than 12 per cent annual return on their monies here. That train may have left the station. It may take years for a new train to form here.”
Pune-based Gaurav Jain of Invest Yadnya, however, feels that the government has brought parity on Angel Tax. “There was no Angel tax on money raised from Venture Capitals or non-residents. Angel tax was only on investment raised from resident Indians. Now, by removing it completely, they have done the wrong, right. Also, with all the exemption and ifs and buts, I think revenue from this tax was limited,” says Jain.
Invest Yadnya’s Parimal Ade added that the Finance Minister’s initiatives “should ease the financial burden on startups and encourage more investments”.
Dr Premnath, Director, Venture Center, a Pune-based deep tech incubator, said, “It is great news that Angel Tax has been abolished for all categories of investors. Previously, Angel Tax was exempted only for resident investors meeting certain criteria. Now, it appears that Angel Tax will not apply to other investors, including non-resident investors or those not meeting criteria listed in the previous exemption. This will definitely help give comfort to many more investors in investing in startups. Good news overall and we await details.”
