To
Shri Arun Jaitley
Finance Minister of India
Subject: No Capital Gain Tax exemption for Angel Networks, is the move justified?
Dear Mr Jaitley,
Greetings from the investor community!
Firstly, I must applaud you and your Government’s efforts to revitalize the economy and provide an impetus to the manufacturing industry. This was probably much overdue. I write this letter on behalf of the entrepreneurial and investor community in India to direct your attention to a serious problem plaguing our taxation system for startups –
The Capital Gains Tax Exemption clause that has been implemented by the Government of India, although is in the best interests of the entrepreneurs, is marred by a myriad of loopholes that ultimately harm the very entrepreneur it aims to support.
The ISSUE :
The Government has announced during Startup India event, that investments in startups would qualify for capital gain exemption at the time of exit but the catch here is that this crucial exemption has been granted only to the funds recognized by the government and not to the Angel Networks.
This basically means that a transaction in which an Angel Network and Angel Fund both are a part of, only the Angel Fund would be benefited but not the Angel Network, notwithstanding the fact that both the parties were equally involved in the deal.
The IMPACT :
The single biggest impact of this clause is that it tilts the balance heavily in favour of Angel Funds as opposed to Angel Networks. The individual investor will by default choose a fund to route his investment as opposed to a network, since it would lead to a direct saving of 20% in taxes.
This initiative has a serious negative impact on the startups which have got an investment via Angel Networks since their investors have to pay a 20% tax upon their exit. This ultimately results in an impact on the valuation and thus lesser gains for the founders.
Angel Networks are by far the most affected by the implementation of this initiative. In a scenario where an Angel Network might have an excellent reach and portfolio, it might still not be able to convince the investors to invest (or reinvest) due to liability of taxes. Considering the investor is taking a risk by investing in a startup, he might not be willing to pay an additional 20% tax on his returns.
The NEED :
The government has restricted the Capital Tax Exemption initiative only to funds as a way to avoid its misuse by individuals attempting to convert the black money into white. Although we acknowledge that the motive behind levying this barrier is in the best interest, it unfortunately deters and counteracts on a much larger scale. Instead of denying the exemption right away, Angel Networks can be judged and accredited on the basis of the track record, years of operations and other such parameters, making sure that the initiative is not being misused in any way.
Angel networks, in today’s startup environment play a crucial part of the ecosystem and snatching away the level playing field from such a vital part of the circuit is definitely not a beneficial move.
I hope this letter communicates the concern of the entrepreneurial and investor community at large. We earnestly hope to boost and support the start-up ecosystem in our country, for which a level playing field is of utmost importance. We sincerely look forward to constructive actions taken by the Government in addressing this grave issue.
Regards,
Harshad Lahoti
Founder and CEO – ah! Ventures