The Startup Tax in India: “It’s like dropping a bomb in a city to kill criminals.”

The startup tax, as proposed by the government is an attempt to kill the already-struggling technology startup ecosystem in India. Apart from the fact that angel funding investment scenario is still in its infancy, charging 30% of the funded amount pretty much leaves a burning hole in entrepreneur’s pocket.killbill

“I believe this clause is extremely ill advised and has probably been triggered by the 2G scam. Unfortunately, it is the equivalent of dropping an atom bomb on a city because one criminal needs to be killed. This clause will completely kill all angel investment in the country and, with that, spell the death knell of first generation entrepreneurship that had begun to mushroom over the last few years,”  [Indian Angel Network co-founder, Saurabh Srivastava].

“Various measures enunciated for SMEs will come to naught because of this one clause. This is because angel investment precedes venture capital investment. For VC’s to fund 10 companies we need 1000 entrepreneurs to be funded by angels. It is common knowledge that when you fund an entrepreneur who just has an idea and not much else, the definition of fair market value cannot possibly be determined by any valuer and certainly not by a tax authority but only resides in the minds of the entrepreneur and the investor. A tax officer could  legitimately see the value as close to zero,  whereas any angel investor who chooses to invest will do so because he / she sees great value and would buy shares at a huge premium because they would want the entrepreneur to hold a majority of the company.” adds Srivastava of Indian Angel Network that has invested in over 30 start ups in the last 6 years.

It’s an irony that while US government just passed the JOBS Act, a bipartisan bill aimed at supporting small businesses enabling crowdfunding, Indian government wants to tax the angel investment instead of giving them a tax break.

“For example an angel investor may invest Rs 1 crore in the Company that has no revenues and no profits and the tax official, unless otherwise “persuaded,” would tax the company at 30% for no reason at all and convert an investment into income”, he adds.

“Rather than giving the angel investor a tax break for making such risky investments for “common good” ( creation of wealth and employment), as is done by most countries in the world, we are in effect taxing them and therefore, encouraging them to put their monies in unproductive assets like farm houses and real estate. it is hard to think of a more retrograde measure and one can only hope the framers of this clause did not fully appreciate the unintended damage it would do. It deserves to be withdrawn immediately”, appeals Srivastava.