The government’s reported move to ease the rules on angel tax is welcome, but insufficient to allow free flow of venture capital to startups. Any cap for exemption from angel tax is arbitrary.
And instead of frequently tweaking rules to address industry’s concerns, the government should scarp the levy to fuel entrepreneurship. Audit trails are more readily generated today, as compared to 2012, when this tax was introduced to prevent money laundering, when someone invests in unlisted companies to convert black money into white.
The thing to do is to improve generation of such audit trails and their followup, not to put hurdles in the path of entrepreneurship, oodles of which India needs to generate jobs for the cohorts entering the workforce every year. Tax authorities can also use the General Anti-Avoidance Rules to check if the investment has been made from tax-compliant sources.
Mandating companies to list their beneficial owners would be another significant reform. The changes now brought about by the government include widening the definition of startups to benefit a larger number of investors and raising the exemption threshold.
A company will now be considered a startup for 10 years from the date of incorporation instead of seven, and with a yearly turnover Rs 100 crore against Rs 25 crore earlier. Registered startups will be exempt from tax on funding of up to Rs 25 crore compared with the existing limit of Rs 10 crore.
If the investor is a non-resident Indian or an alternate investment fund or a large listed company, the tax would not apply. These are sound measures, except for the invitation to round-trip investment by routing it through a non-resident.
Establishing the identity of those buying shares at inflated prices and receiving loans from the investee companies that are written off has become far easier now, with unique identifiers that include the permanent account number and Aadhaar linked to bank accounts. The need is to build on these, to check money laundering, instead of creating difficulties for all startups.
This piece appeared as an editorial opinion in the print edition of The Economic Times.
via Scrap The Angel Tax, Don’t Just Dilute It