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Tax on seed funding to be scrapped

The government has decided to scrap a tax on seed funding provided to start-ups by Indian angel investors in the upcoming Union Budget, to help domestic financiers bankroll new entrepreneurial ventures under its Start Up India campaign.

Finance act 2013 introduced a tax on seed capital provided to startups by domestic angel investors ,thus domestic angel investors are subjected to double taxation.

  • The tax provision in question treats infusion of funds by domestic angel investors as income in the hands of the start-up, making India the only country in the world to penalise local angel investors in such a manner.

  • Tax is one of the key reasons that 90 per cent of Indian start-ups are financed by foreign venture capital and angel funds.

  • This tax applies only to domestic investors.

  • The problem is that tax is levied at the time of investments not at the time of booking profits, so it discourages domestic angel investors who are keen to bet on start-ups as the stock markets are not going anywhere.

  • The tax treatment and difficulties of doing business in India as start-ups attain scale, make it attractive for such ventures to relocate out of India to countries like Singapore.

  • 65 per cent of successful start-ups that began in India have moved out of the country.

  • According to estimates by the team of officials working on the Start Up India programme, start-ups in the country received around 9 billion dollars of funding in 2015.

  • Returns made by domestic individual investors from their start-up investments are taxed at the highest marginal personal tax rate (around 33 per cent), while investments routed through a Mauritius-based fund or by corporates who only need to pay long term capital gains tax of around 10 per cent are taxed much lower.

What is seed capital ?

Seed capital is the funding required to get a new business started. This initial funding, which usually comes from the business owner(s) and perhaps friends and family, supports preliminary activities such as market research, product research and development (R&D) and business plan development.

who is an angel investor?

SEBI (Securities and Exchange Board of India) has defined Angel Investor as a person who proposes to invest in an Angel Fund and who has net tangible assets of at least two crore rupees, in individual capacity, excluding value of his principal residence, and who:

  • has early stage investment experience, or

  • has experience as a serial entrepreneur, or

  • is a senior management professional with at least ten years of experience;

5  things about start ups :

* Startups are projected as the next big employment generator in the country

* Startups can play a key role in the delivery of various government programmes through the building of apps
* The biggest challenge for startups is on the ease of doing business as multiple regulations distract them from their core objective
* The current tax regime has forced many startups to register themselves overseas and in the process losing the value created in India
* A change in tax regulation can boost further investments into the startup segment

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