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A mixed bag, say startup backers

29 February, 2016

India’s leading seed investors have welcomed the government’s move to simplify the company registration process and reduce the term for long-term capital gains (LTCG) tax accruing out of investments in unlisted firms.

Though investments in young firms will continue to attract LTCG at the rate of 20 per cent, the holding period has been reduced to two years from three years earlier, Finance Minister Arun Jaitley said in his budget speech. He also assured entrepreneurs that the process of registering a startup will now take only 24 hours. (For details on the startup-specific provisions in the budget, click here.)

However, industry watchers aren’t too enthused with the government’s move to give tax breaks to companies for the first three out of five years since inception. Also, the formation of a Rs 500 crore fund focused on women founders and entrepreneurs from backward classes has generated mixed response.

Some investors and accelerators were disappointed as the government didn’t address the needling issue of angel tax, which startups need to pay when they raise funding from investors.

Jayaroopa J, principal, Unitus Impact Fund:

I believe the Rs 500 crore initiative towards encouraging entrepreneurship for women and SC/ST entrepreneurs may not by itself be adequate. However, the thrust on infrastructure development, 100 per cent FDI in food processing and the all-round development on the rural economy will be good for the startup ecosystem. Indian startups suffer more from gaps in the infrastructure and the overall ecosystem. Focusing on these aspects will provide a stimulus to startups. Funds always follow good startups in a good market.

Sunil Goyal, founder and CEO, YourNest:

No relaxation on TDS on cash flow of startups is a miss. The startup tax (also called angel tax) is the biggest pain of our startups. Silence on the startup tax on equity funds raised at a premium is the biggest disappointment.

Ajeet Khurana, angel investor:

Not only is it true that very few startups make any meaningful profit, if at all, in the first few years, the eligibility criteria for the 100 per cent tax exemption (for the first three years) is a huge obstacle. The criteria were listed in the Startup India action plan document, and I am yet to come across any entrepreneur who is excited by this proposal. And here’s the paradox: while on the one hand the government is talking about tax exemptions on profits, on the other it is taxing startups even when they do not make revenue by imposing the angel tax.

Neha Khanna, director, Enablers:

In a space which is already struggling to receive funding and support as the ecosystem develops, introducing reservations leads to demise of innovation and contradicts the very spirit of entrepreneurship which should be free for all to explore.

Sid Talwar, co-founder and partner, Lightbox:

I would have preferred seeing some concessions on the indirect tax front, related to VAT and service tax. These make it much more competitive than a tax holiday. What I was hoping would happen to a larger extent was the ability for us to rethink taxes especially when it came to disposable income. Taxes and concessions to startups is sweet but I don’t think anything is game-changing at this point.

Utsav Somani, LetsVenture:

The 100 per cent tax exemption must be extended beyond three years for it to make actual sense. The move to reduce the holding period on LTCG is great for M&A transactions and comes at a time when acqui-hires are happening and consolidation has become common in India.

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A mixed bag, say startup backers

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