Last week, the government eased the procedural norms for exemption of tax on start-ups (angel tax) in response to protests from the industry. The new rules provide for a tax-waiver, if the aggregate paid-up share capital and share premium of a start-up after an offering of shares does not exceed Rs10 crore, if the angel investor has filed income tax returns of at least Rs 50 lakh for the year preceding the year in which the investment was made, and if the investor has a net worth of at least Rs 2 crore. The other relief is in the form of the dismantling of the bureaucratic layer, the inter-ministerial board, which used to vet the credentials of these firms. Hereafter, the Department of Industrial Policy and Promotion will directly route the applications to the Central Board of Direct Taxes, which will have 45 days to decide if investors in the start-up are eligible for a tax-waiver.
The latest move may at best partly assuage some of the concerns of start-ups and investors. Some entrepreneurs had written to Prime Minister Narendra Modi requesting him to step in and sought a revision of the tax provision — as high as 30 per cent on investments by individuals in unlisted firms, if the price is higher than what is known as fair market value. It is this share premium that has been a major bone of contention between angel investors and the tax department. Entrepreneurs argue, and rightly so, that start-ups need a good amount of capital at the early stage, which angel investors provide at a premium. Indian start-ups had raised over $38.5 billion in the last four years through more than 39,000 ventures.
It would surely help if Indian policymakers look around and assess what makes a country like Israel — now known as the Start-up Nation — a magnet for investors such as Bill Gates and Warren Buffet. That has a lot to do with the enabling role of the government which has provided not just fiscal incentives as in some other countries, but also ensured a positive investment climate. Leaning on new age entrepreneurs to boost tax collections can at best be a near-term view, but a failure to smoothen the path for start-ups runs the risk of discouraging potential entrepreneurs and their ability to create jobs, boost revenues and innovation in an economy which needs all these in large measure.