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Startup India

In India, Startups are at War with the Government. Where will the Buck Stop?

Sources reveal genuine tax liabilities are being pushed under the guise of angel tax by some startup players. At a time when the India government is attempting to create a startup-friendly ecosystem, how will it address woes of genuine startups? How will India become #1?
In India, Startups are at War with the Government. Where will the Buck Stop?
Image credit: Shutterstock.com
Entrepreneur Staff
Associate Editor, Entrepreneur.com
7 min read

You're reading Entrepreneur India, an international franchise of Entrepreneur Media.

India’s startups and the Indian government have one agenda in common – steer India to become the #1 startup ecosystem in the world.

While matured ecosystems of US, UK, Europe and Israel are lauded, Indians worldwide want India to race to the top of technological advancements and create the best startups to address the large scale of the Indian economy as well as the world.

This unique common agenda is undoubtedly unparalleled. Anyone questioning the intent of either of the two – India’s startups OR the Indian government – is up to malice and deserves to be dismissed.

But we all know, Rome wasn’t built in a day.

The government has been repeatedly reiterating that it wants to help ambitious startups and entrepreneurs to grow quickly. The Narendra Modi-led government’s pet projects – Startup India, Digital India, Make in India, STEP, TREAD, PMKVY – all are focused on startups. Every government-led conference or summit is designed around startups’ growth in different sectors, how the startups of India will be job creators and why India needs to take pride in its talent.

In its attempt to really see India Shining, the government has mulled tweaking policies and regulations flagged by startups’ associations, industry groups, industry veterans and startupreneurs.

From Indian Prime Minister Narendra Modi to NITI Aayog CEO Amitabh Kant, all Indian politicians are constantly speaking about taking the agenda of Indian startups’ growth ahead.

Then where is the problem?

India is the fastest-growing economy in the world. With doors to foreign direct investment opened to a large extent in all sectors, money from overseas is flowing into India. Every big investment group, venture capitalist and evangelist wants to earn a penny from India’s burgeoning consumption.

This interest by investors opens the window of opportunity for many – startups looking to start, to scale, to go global and innovate current setups. In such a scenario, India being a free country unlike its competitive peer China faces the threat of being treated like a dumping ground for capital. The ambiguity that such flow of capital brings is one of concern and the onus lies on the government to protect India’s interests while keeping its opportunities intact.

Here comes the devil and it does wear Prada.

To ensure no malpractices by investors end up eroding the governments’ big opportunity to earn in taxes, the Indian government has put an Angel Tax in place. This tax is a simple one, which refers to the income tax payable on capital raised by unlisted companies via issue of shares where the share price is seen in excess of the fair market value of the shares sold.

Some clauses of Angel Tax have not worked well with the investor community. There is abundant dialogue on how India cannot sustain a domestic startup ecosystem when domestic pools of capital are at a marked disadvantage compared to foreign capital pools.

Siddarth Pai, the founder of 3One4 Capital based out of India, thinks rather than an ‘angel tax’, India should start calling this tax what it is: an Indian tax. “No other country in the world works actively against its own populace from investing in startups or actively taxes capital receipts as income,” Pai told Entrepreneur India.

Pai has called the Angel tax, which was introduced in 2012 by the previous regime, the single Achilles Heel for Startup India and something that needs to be done away with.

According to a survey conducted by LocalCircles and the Indian Private Equity & Venture Capital Association, over 73 percent of startups that raised capital between INR 50 lakh to INR 2 crore in India have received angel tax notices from the IT department till date.

This has rattled the startup ecosystem of India to the point of no return. From investors to startups, all are fiercely criticizing this cornering by the government and are profusely lobbying to push the government to roll back tax notices and provide tax exemptions.

The nail in the coffin was one peculiar case.

The Catalyst

Among the first cases where a startup founder has alleged a ‘wrongly deducted angel tax’ via a real cash transaction done by the IT Dept last week has fuelled a full-blown war between India’s startups and the government.

The online food supply start-up catering to train travellers TravelKhana, which depends on cash transactions and not online transactions alone for its sales, claims the IT department froze the company’s four company accounts and withdrew a sum of INR 36 lakh as angel tax on account of a tax order of INR 2.3 crore issued last December.

An official statement by the CBDT published by newswire ANI said the department has denied that the sum withdrawal is a part of angel taxation. “On ascertaining the facts, it is seen that the additions in the case were made under section 68 of the Income-tax Act, 1961 on account of unexplained cash credits and not under section 56(2)(viib) on account of premium on shares, as has been alleged,” the report said citing CBDT.

Entrepreneur India’s sources reveal unaccounted cash to the tune of INR 3 crore had been taken by TravelKhana. When the IT notice was issued, the company wasn’t able to provide the source of the unaccounted money, which led to the action.

Sources say genuine tax liabilities are being pushed under the guise of angel tax by some startup players.

It is difficult to independently ascertain whether TravelKhana indulged in tax aversion but one of the sources said in the case of sale primarily in cash, it becomes a very easy route for all kinds of companies to avert tax. “Some companies deposit money in cash. Then show themselves as vendors and take cheque payments, the source said.

TravelKhana has rubbished the IT Dept’s claims and has taken to social networking site Twitter and blogging website Medium to speak about its woes in detail and is in no mood to back down.

Another startup founder Siddhartha Ahluwalia, the co-founder of Babygogo, claimed that the IT Dept had deducted INR 72 lakh from its company bank account. No further details could be furnished on account of this claim.

Investors such as Rajesh Sawhney, K Ganesh, Gopal Srinivasan, Shanti Mohan, Pankaj Jain, Alok Mittal among others made strong statements on Twitter ridiculing the tax notices sent by the IT Dept and the action on TravelKhana. 

Industry body TiE’s Delhi-NCR wing has decided to put up a representation with respect to startups who have received notice on angel tax. It has sought details of startups that are affected or know of a startup that is.

As this furore picks steam, the government readying to give exemption to registered startups.

Resolution

Indian news wire PTI reported the government is considering giving complete exemption to startups from angel tax once they are certified by the Commerce and Industry Ministry, a move aimed at helping budding entrepreneurs citing official sources. 

This move may be gelled with capping the investment to a much higher level of angel funds so that a good number of startups do not face the taxmen, the PTI report said.

An investor on condition of anonymity said what India needs is handholding and an organization that solely fights for the rights of startups. He claims investors in angel networks are up in arms but frightened to annoy either the government or the startups.

“The appropriate way is for the government to screen angel investors. These investors should necessarily be a part of angel networks to ensure transparency,” the investor said.

Will the government give India’s startups the olive branch or will India’s tax laws prove to be a deterrent for the survival of startups in India? Only the run up to Elections 2019 will reveal.

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