Budget 2016: Capital gains tax on start-up angel investors should go

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The start-up community has pinned a lot of hopes on the upcoming Union Budget.

The Startup India policy announced last month was full of good news for entrepreneurs and investors. A key highlight was launch of Rs 10,000 crore fund with exemptions from income tax, capital gains tax and a big rebate in patent filing cost. The government also reiterated that it doesn’t want to burden the burgeoning start-up segment with unnecessary regulations. Though the mood among entrepreneurs and investors is upbeat but everyone will be keenly watching the rollout procedures and protocols for the announcements made earlier. A dedicated start-up policy is an unheard thing in the Indian context but its success will be determined by follow-up announcements in the Budget.

The creation of Rs 10,000 crore fund for start-ups needs a complete detailing about how the fund will be disbursed, nodal agencies that will be decision makers in this case. The big picture here should be that the process of raising funds from this government corpus should be an easy one and only Securities and Exchange Board of India-registered funds be allowed to raise funds from this corpus.

VC funds would be looking out for exemptions in taxation on angel investments, which are perhaps one of the biggest reasons for early-stage start-ups to grow and reach a scale to attract subsequent funding. In countries like the UK, angel investments not only have no capital gains tax but also get income tax relief in the year when the angel investments are made. The Indian government, too, has understood the value of start-ups as a prime driver of economy and a powerhouse of employment generation; they need to look at tax anomalies within this sector. There is hope that the Budget will move towards similar direction and remove capital gains tax that angel investors pay.

Industry body Nasscom, in its recommendations, has highlighted that start-ups should be allowed to carry forward the losses even if the ownership of the company changes. This is critical because as a start-up grows and becomes mature, there are chance of its ownership changing with exit of old investors and entry of new or in some cases, founder exiting the business. The government has assured that shutting down a company which is incurring losses to its investors will be simplified. This has received thumbs-up and now all eyes are on detail of its implementation, which we expect to be clarified in the Budget speech.

Service tax is another pain point from cash outflow perspective. Start-ups as a principle run a tight ship and that’s how even investors like it. Thus, it is important for cash flow to be positive. However, a series of taxes on start-ups tend to put pressure on the cash flow situation of the company. Thus, a three-year waiver on service tax paid by start-ups, is much desired. The much-awaited GST rollout is expected to simplify the tax structure further, bring down cost of doing business and generate more revenues, especially for e-commerce companies.

Two main initiatives – Make in India and Start-up India – are touted India’s most ambitious schemes to promote start-up ecosystem in the country. The stakeholders – government, startups and investors – have to contribute to making it a success. For this, a string of initiatives from government’s end is required to give fillip to the manufacturing segment. Smartphones are emerging biggest drivers for many tech start-ups, thus a detailed policy rollout to encourage more local mobile manufacturers to make phones in India will put India on global manufacturing map.

The central government has made many announcements in the last few months for start-ups and Budget definitely will carry forward them to implementation stage. But like they say devil is in the details. The FM should take the devil out and give us an uncomplicated business environment to grow the Indian start-up ecosystem.