Angel investors and incubators’ wish list

India should do away with the angel tax and establish parity in the taxation regime for investments in unlisted and listed companies, a cross-section of startup investors believe.

More importantly, the country’s top accelerators and incubators want the government to share a blueprint for implementation of its ambitious ‘Startup India, Standup India’ programme, in the upcoming Union Budget.

“Now the finance minister needs to tell us which initiatives are on priority and how much money will be available to support which initiatives in the coming fiscal. In that sense, I don’t expect many initiatives/ announcements in the Budget. I just want to see the money,” says Ravi Kiran, co-founder, VentureNursery, a startup accelerator.

Taxable capital gains

Angel networks such as the Indian Angel Network want the government to speedily move towards taxation parity when it comes to investments made in unlisted companies by AIFs (alternative investment funds) and angel groups.

Currently, capital gains on investments in publicly listed companies are not taxable if held for over one year. If held for less than a year, it’s classified as a short term investment and taxed at 15 per cent.

But capital gains arising out of short term investments in startups is taxed at 33 per cent and at 20 per cent in case of long term investments.

“We do expect that capital gains tax for AIF funds and angel group investors will be aligned to the current tax regime for investments made in listed shares,” said Padmaja Ruparel, president, Indian Angel Network.

Agrees angel investor Ajeet Khurana, “Since the present long term capital gains tax is zero per cent for listed stocks, the same should be applicable for unlisted stocks too.”

Interestingly, under the Startup India Action Plan, angel investments in startups would qualify for capital gains exemption at the time of exit. However, the catch is that exemption will be given to only those who have invested capital gains in ‘the Fund of Funds recognised by the government’. The government had announced a similar fund of funds of the same size to support startups and small enterprises in its mid-term Budget in July 2014.

Angel tax

A recent report released by venture debt firm InnoVen Capital suggested that 74 per cent of bootstrapped and angel-funded companies were not aware of the existence of angel tax, as enshrined in Section 56 of the Income Tax Act. Industry watchers feel that angel tax should be removed and tax incentives should be introduced to promote angel investing as a viable channel. Rajesh Sawhney, co-founder of food-tech startup InnerChef and GSF Accelerator founder, wants the government to set a cap, of say Rs 25 lakh per year, for tax-free angel investments.

Abhishek Mitra Gupta, business head of Times Internet-operated incubator Tlabs, expects finance minister Arun Jaitley to offer tax rebates to angel investors in this year’s budget.

VentureNursery's Kiran says the FM should consider the introduction of angel tax credit, so that angel investors get the benefit of investments made in qualifying startups in the year of investment, instead of waiting for up to seven years to make capital gains. “Initially, investors associated with angel networks and accelerators can be automatically provided with this incentive. Later, even individuals who make investments independently or in small groups can be included,” he says.

In the Startup India Action Plan, the government had proposed income tax exemption for startups for the first three years of their operation. Income tax exemption may not be impactful in the initial years as young firms carry the startup tag for five years and may have little to show as income in the first few years. As an incubator (through its 10,000 Startup programme), Nasscom is pushing for exemption from MAT as well as from indirect taxes, said Bishakha Bhattacharya, senior director - policy, Nasscom.

Measures like these will help in expanding the total base of active angel investors to 100,000 over the next five years from 1,000 presently, pointed out Kiran.

“The FM has an opportunity to walk the talk by providing infrastructure and resources support to private accelerators, who, despite being for-profit organisations, make investments that should qualify as not-for-profit, since there is hardly any visibility of returns,” Kiran added.

Sawhney expects the budget to highlight funding support to the top 100 incubators and accelerators in India. Gupta seeks encouragement for private accelerators and also expects announcements around the setting up of private-public incubators. He also seeks swifter rollout of the various grants that were promised to accelerators and incubators under the Startup India Action Plan.

Corporate participation

Moreover, the government should offer tax breaks to corporates so that they can create internal acceleration programmes, say industry experts. If 100 companies were to get tax exemption on say Rs 10 crore each (on an average) by setting it apart for startup investments, there would be terrific momentum in the ecosystem, said Kiran.

Not everyone is enthusiastic about corporates lending support to government-backed incubators. “In one of the earlier budgets, corporate support to government supported incubators was included as CSR activity. I am not sure how many companies got excited with that and what the outcome has been,” Kiran said.

“The truth is, upstream value in the Indian startup ecosystem is being driven by a few dozen private accelerators and several angel networks, not government supported incubators, most of which run as public sector units,” Kiran added.