Good news! TiE working on options to ease startup tax hit

It’s already being called the ‘startup tax’. The controversial share premium tax, which Budget 2012 has proposed, is causing serious concerns in entrepreneurial and angel investor circles. But there seems to be some hope on the horizon, finally.

After the government appointed S Ramadorai, former CEO of Tata Consultancy Services (TCS) to look into the problems the proposed tax was causing to startups and entrepreneurs, frontline entrepreneur organisation The Indus Entrepreneurs (TiE) is now working on a set of alternatives which it will suggest to the government through Ramadorai. That, TiE believes, will address the problems the tax can cause for genuine startups and angel investors.

Ramadorai is also the advisor to the Prime Minister in the National Council for Skill Development.

Confirming this, TiE’s executive director - operations, Kanchan Kumar, told Firstpost that the organisation would come up with a set of alternative solutions to ameliorate the problem for genuine startups while keeping the government’s concerns over unaccounted money in mind.

As reported in Firstpost earlier, in Budget 2012, finance minister Pranab Mukherjee proposed a tax on the premium over the fair value of shares bought by investors in closely-held companies. This premium would be treated as income, not investment, and taxed at the highest rate of 30 percent. The proposal also gives enormous powers in the hands of assessee officers who need to be convinced about the fair value of such shares. Venture capital firms, however, are outside the purview of this tax.

Effectively, this deals a body blow for small startups and enterprises that depend heavily on angel investors for funds, and can derail the rapidly growing startups and angel investor movement in the country. TiE and other angel networks have already said the move is a huge blow for the entrepreneurship movement in the country.

While the TiE solution is still in the works, what is broadly proposed as a workable alternative is a cap on the amount of money raised by such startups, above which the funds can be subject to the tax. There could be a cap for individual investors, and also a separate and higher cap for companies that are not registered VCs. The tax will then be levied on transactions above those amounts. The caps would be arrived at, based on typical deal sizes that angels and investor companies are usually involved in.

“The idea is to sift out the genuine deals and ensure that true entrepreneurship and angel funding do not suffer. We will suggest these solutions to Mr Ramadorai soon,” sources said.

The second - and equally important - move being examined by TiE is an organization for angel investors on the lines of a self-regulatory organisation (SRO). This will not be a statutory body, but a kind of self-regulatory association in which angel investors can be members. Angels who are members of this organization can then be exempt from the premium tax. This will give the government comfort about the authenticity of the angel investors who are funding these startups. Currently, the angel investor space is very loose and unorganised and largely based on individual or small group investor initiatives.

Sources in TiE said these proposals would be submitted to Ramadorai shortly. “We genuinely believe it was never the government’s intention to stymie the growing entrepreneurship movement in the country. The concern on unaccounted money has unfortunately caused this collateral concern. I am sure the government will understand it and create a solution.”

The writer is editor-in-chief, Entrepreneur magazine.