Transfin.
HomeNewsGuidesReadsPodcastsTRANSFIN. EOD
  1. Reads
  2. Lite

Startup India Scheme: Angel Tax India, GST Compliance Headwinds For Seamless Ecosystem

Senior journalist and communication strategist, A subject matter expert on bureaucracy, governance, PSUs, start-ups and policy matter.
Jan 20, 2018 6:55 AM 4 min read
Editorial

It was indeed the “beginning of a Big Bang for India!” as articulated by Masayoshi Son, Chairman and CEO of Softbank, after Prime Minister Narendra Modi launched 'Startup India' on August 15, 2015 while addressing the nation from the ramparts of Red Fort.

 

What followed was a commitment to build a robust startup ecosystem in the country. According to an analysis by YourStory, in 2015 close to $8 billion was invested in Indian startups. Though hitting a low of $4 billion in 2016, investment appears to have recovered on the back of jumbo deals to reach $14 billion in 2017. However, funding and even business and market drivers aside, how conducive is the environment in India to kick-off a venture today? 

 

Mandatory compliances and government policies can extract a significant part of any early stage company's resources. Are tax dilemmas such as startup 'angel tax', GST and policy lacunas bogging down Indian startups?

Startup India Scheme launched by Prime Minister Narendra Modi

 

Angel Tax Definition?

 

According to a report by Nasscom, 2017 saw seed investments, which marks the first round of financing for a startup at the idea stage, falling by 53% due to the issue of tax on angel investment. An angel investor is an individual who provides capital for a startup, usually in exchange for convertible debt or ownership equity. The angel tax rate in India currently stands at a whopping 30%.

 

There is a palpable scare among startups after the Income Tax department in 2017 sent notices to around 200 entities for raising funds through preference shares in excess of what it considers the fair market value and also started questioning consultants and accountants on their methods of valuation assessments.

 

Though the Government says that the move is an attempt to crack down on suspected black money flow into the startup ecosystem, experts refuse to buy the argument.

 

GST COMPLIANCE & Tax Deduction at Source (TDS)

 

Though the Government has exempted startups and small traders having up to INR20 Lakh annual turnover from GST compliance, many are compelled to register under the GST Act due to input credits claimed by vendors, which are required to have a tax invoice (of purchase) or debit note issued by a registered dealer to be able to claim input credit under GST.

 

There is another interesting catch in the GST compliance exemption. If a startup, which supplies goods or services, or both, makes an inter-state supply, then their turnover becomes immaterial and they must register under GST. This inter-state supply may even denote a supply from Delhi to Gurgaon, the distance between which is only a few hours!

 

Another issue faced by startups in India is tax liability from TDS. According to Nasscom president R Chandrashekhar, it is a liability on the startups to pay TDS “even before they get decent revenues”.

Are tax dilemmas such as 'angel tax', GST and policy lacunas bogging down Indian startups in India?

 

VAGUE GOVERNMENT POLICIES

 

As per the Government’s definition, to be eligible to avail benefits of various schemes, a startup should be “incorporated or registered in India not prior to five years, with annual turnover not exceeding INR25 crore, working towards innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property.”

 

According to experts, the criteria as defined by the Government to be eligible to get the startup tag is flawed as there are several businesses that are not or marginally reliant on technology or IP.

 

Dhruv Suri, co-head of legal firm PSA’s unit Victus which is dedicated to the startup space, explains, “Let us imagine that a startup is leasing furniture to customers on a minimum of a one-year lease. It is looking to solve a fundamental problem faced by young people who shift cities...This business, in my view, is innovative because it addresses a very practical problem. However, it is not really driven by technology or intellectual property...Would such a business not be entitled to benefits under the government’s action plan? Who will decide whether a startup is actually working towards innovation or development and whether it is heavily or marginally relying upon technology and IP?”

 

The government must ensure that is greater clarity regarding the definition of a startup so that the eligible lot can easily avail the benefits.

 

FACT CHECK: INDIAN STARTUP ECOSYSTEM vis-a-vis OTHER GEOGRAPHIES

 

  • According to The Startup Ecosystem 2017 report compiled by the Startup Genome project, which tracked 55 startup ecosystems across 28 countries, Israel’s capital Tel Aviv was ranked sixth in the world, whereas Bangalore was at No. 20 and the only Indian city mentioned in the list
  • As per a Economic Times report, Startups in Dubai get INR60 Lakh angel funding from the government in the early stages, which is unlikely to happen in India
  • In India, a startup even with no revenue has to file audited accounts and submit returns every year. The process incurs significant costs. Whereas, startups in Singapore are exempted from these cumbersome requirements under the "Exempt Pvt Ltd" category
  • Unlike India, Mauritius allows capital gains tax exemption to VC funds upon exits
  • Singapore offers zero capital gains tax upon exits, India does not. The corporate tax in the island nation is flat 17 percent on annual income of SG$300,000 or more, whereas in India, it is a flat 33 percent. However, startups registered after March 1, 2016 in India are exempted from corporate tax for three years