Stakeholders’ Views On Taxing Angel Investments In Startups

20 March, 2012

INVESTORS

Praveen Chakravarty, CEO, Investment Banking & Institutional Equities at Anand Rathi and co-founder of Mumbai Angels

“The first thing is that move basically deems that anything above fair market value will be taxed at 30 per cent. I agree that there maybe some noble intent behind this but unfortunately this has the potential to kill entrepreneurial-startup ecosystem. In the same budget the union government has announced setting up of a Rs 5,000 crore fund for MSMEs acknowledging that they don’t easily have access to finance.

For a small business, 30 per cent less money has a huge impact and it could mean six months to one year of cash flows. Second problem is that it places unnecessary and arbitrary power in hands of assessing officer, which could lead to its exploitation of these businesses.”

Mukund Mohan,  an active angel investor and Chief Executive Officer of Jivity

“In the last few days, four to five start-ups have approached me because I am not an Indian resident. A lot of my friends have also been approached because of the same reason(government seeks to tax angel investment by resident Indians). I think there will be a community of 1,000-2,000 individuals who have returned to India over the last few years and of these around 100 people would be interested in start-up investment.

The move will impact e-commerce start-ups looking to raise angel capital as FDI is not allowed in multi-brand retail. And the Indian investors would not like to pay taxes on the investment. Other start-ups in areas like mobile application, cloud computing and SaaS will find a way around by registering through US entities.”

Rajesh Sawhney, founder of Superangels of India Network

“Angel investing is the backbone of innovation and start-up culture. In India, this is a nascent asset class and only a handful of investors are really doing it. We need to nurture a culture of angel investing in India to spur innovation. Any mis-step by the Government at this stage to tax directly or indirectly such investments will be extremely harmful. In other countries, governments are encouraging and incentivizing angel investing. Our various business organisations such as CII, FICCI, Assocham need to educate the Finance Ministry and bureaucracy on the beneficial impact of angel investing on the economy and job creation.”

Gopal Srinivasan, CEO & MD of TVS Capital and part of Chennai Fund

 “Government is very worried about loss of revenues due to money laundering through this route as well as corruption being packaged through the structure. These are negatives for the economy and government must fight this, strong steps are always welcome. I call angel funding India’s community capital and it’s very critical. What is really worrying is that angel funded companies are a large feeder for venture capital and PE industry. In many ways this is the nursery for the entire PE/VC industry.

Some very clever structures can emerge now. Everyone can now get organized as a fund and seek registration with Sebi but this may be tough as individual are not comfortable in that structure.

Government could also look to apply this rule to larger deals as angel rounds are typically between Rs 2-5 crore.

My bigger concern is because you are affecting the nursery. Startups do not have access to expensive lawyers and accountants for structuring, which should not be there at an early stage. It is rational to assume that this was not the intention of the government given contrary measures like Rs 5,000 crore fund for MSMEs. My confidence level is high that it will get sorted out.”

Sasha Mirchandani, co-founder of Mumbai Angels and founder of Kae Capital

“Obviously, it’s a retrograde step. It’s like taking one step forward and two steps back. The government should realise that the kind of jobs that these startups could generate will be huge. This move could be a

death blow to the sector which had just started building momentum in terms of more individual investors, angel funds, start-ups and exits. They have to reconsider before this is  passed into a law and

hopefully it will be pulled. Instead of giving tax breaks to risk capital, we are being taxed.”

Padmaja Ruparel, President of Indian Angel Network (IAN)

“This is a killer clause. It is unheard of in the world turning an investment into an income. We are trying to talk to the government before the budget gets passed in the parliament. I would like to say that it is not government’s intention to hurt entrepreneurship and innovation but to encourage it.

Value of shares lies between a startup and an investor, it cannot be decided by an income tax officer. I feel there is a very quick education needed from both sides.  Policymakers were trying to reach a

solution with this, but it is like gassing a whole room to kill a mosquito.

Now everybody wants to hurry their dealmaking and its has created a lot of nervousness among the entrepreneurs. Valuations will become depressed, with 30 per cent of invested money (which is from a taxed income) going away in taxes.”

Sunil Kalra, Angel Investor

“Startups and angel Investors have a hard enough time trying to incubate / build businesses; If unfriendly ”edicts” such as this get approved it will kill the slowly forming entrepreneurship ecosystem in the company before it blooms.”

Alok Mittal, managing director at Canaan Partners

“This is something which will have unintended consequences. What this effectively does is hurt angel investments. When that asset class is disturbed it will have an impact on venture capital deals in terms of pipeline and ecosystem.”

INVESTMENT BANKERS

Deepak Srinath – director, Viedea Capital Advisors

“I think the startup and angel investor community is fairly alarmed by the implications of such a move. My sense is that government did not take into consideration the impact on angel investment, but the clause is implemented more to prevent individuals from parking their money in entities. I am sure upon consideration by the government there will be some revision.

Ironically, one could also look at this from different perspective. Number of individual investors in startups have increased and the space has also become competitive with seed funds. If the taxation clause is not resolved, any startup entrepreneur will raise money from these funds rather than angels. Also, if the policy is not revised then more and more angels will start coming together to form a fund like structure.”

ENTREPRENEURS

Rohan Dighe, Founder of Social Deal Factory, which is looking to raise angel funding

“Probably we will try and raise little now (because big deals take time) and go for a seed round later or maybe try raising from an international investor. Now the strategy will be to make the maximum

of as little funds as available, validate on the idea, get revenue numbers up and raise the seed round.

India is a country where angel deals already take time, deals in numbers are significantly less and hurdles such as these are just going to make things worse. This budget has found an ultimate way to

kill startups, cutting off what is a valuable source of funding.”

Rajarshi Chattejee, co-founder, Rooja.com

“The complication of the new budget has suddenly created a huge rush in the companies and the investor’s community. It definitely gets a little tricky as now we are debating between an angel or a VC round. If 30 per cent of the angel investment goes to taxes it might be hard to go with angel rounds especially since angels will probably want the same amount of stake and at the end of the day we will sell equity at a lower price. Angel funds come with a lot of mentorship and the funded companies can grow slower and in a more sustainable way understanding the business as they go – often times is a preferred way to build your business as compared to raising money from a VC.”

Saurabh Dhapodkar, Co-founder of Shopveg.in

“I feel more start-ups would now prefer to burn their own money initially and then go for VC-funding straightaway. If we have to give away 30  per cent of the seed funding as tax, a major amount of it is gone. Seed funding is very crucial to business and a major part of it is gone.”


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Stakeholders’ Views On Taxing Angel Investments In Startups

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