Startups breathe easy as FM exempts angel investments from tax hit

The startup ecosystem and angel investors are a relieved lot after Pranab Mukherjee’s speech in Parliament on 7 May.

The finance minister has proposed to exempt angel investments from the purview of the proposed share premium tax on closely held companies which was part of Budget 2012.

Said Mukherjee in his speech on the Finance Bill: “It has been proposed in the Finance Bill that any consideration received by a closely held company in excess of the fair market value of its shares would be taxable. Considering the concerns raised by ‘angel’ investors who invest in start-up companies, I propose to provide an enabling provision in the Income Tax Act for exemption to a notified class of investors.”

Organisations like The Indus Entrepreneurs (TiE) and several other angel networks across the country were shell-shocked when, as part of proposals to unearth unaccounted money, the finance minister had proposed a tax on share premiums charged by closely held companies. This effectively meant startups, who are typically closely held and receive funding from angel investors, would also have to pay the tax, which would effectively cause a huge hit on small companies and the entire entrepreneurial ecosystem in the country.

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Firstpost had also reported on the major damage this proposed tax would cause to the spirit of enterprise across the country, particularly for startups.

TiE had also suggested other options to the ministry to get around this problem, particularly by creating exemptions for categories of investors, so that the angel investor ecosystem, which powers entrepreneurship in a major way, is not killed by what was being called the ‘startup’ tax. The FM’s statement has come as a major boost to the entrepreneurial space.

Sources in TiE said it was a huge boost to see that the FM had understood the legitimate concerns of the startups and angel investors and had proposed an exemption to a notified category of investors.

“While we will have to verify the exact wordings in the Act after the proposed Bill gets enacted, we are hopeful this would help sort out the issue,” a TiE functionary told Firstpost after the FM’s speech on 7 May.

The idea behind the proposed tax is to ensure that unaccounted monies do not find their way into closely held firms under the garb of share premiums. The proposal also envisages convincing the tax assessing officers of the fair value of shares, and the amount charged as premium over the fair value would be subject to the tax. While most agree that unaccounted money may be finding its way into companies through this route, the concern was that startups would be hit and that angel investors, who invest not only money but also time and knowledge through mentoring, would also be penalized along with the actual wrongdoers. Angel investors had likened the tax proposal to bombing a city just to find a criminal.

(The writer is Editor-in-Chief of Entrepreneur magazine)