Budget puts start-up angel tax worries to rest

Finance minister Nirmala Sitharaman’s first budget speech addressed pressing demands of the start-up sector, ironing out issues related to the problematic “angel tax” with a reduction in scrutiny by the income tax department and the relaxation of some conditions for losses reported by start-ups. These are likely to aide ease-of-doing-business for start-ups.

The government has also proposed a television programme dedicated to start-ups on state broadcaster, Doordarshan.

The angel tax clarification is a positive step, especially since angel funds are critical to getting start-ups out of the gate.

“This will facilitate the growth of numerous start-ups in the country which continue to face financial and operational constraints,” said Saru Tumuluri, chief executive, Khosla Labs, a technology product incubator.

“Start-ups in India are taking root and their continued growth needs to be encouraged,” noted Sitharaman in her maiden Budget speech, presented on Friday.

Start-ups in India have raised a record $3.9 billion from venture capitalists in the six months ended 30 June, as the world’s biggest investors doubled down on their bets, buoyed by the Flipkart-Walmart deal last year.

Investments this year across 292 deals are up 44.4% from the $2.7 billion received by domestic start-ups in the first half of 2018, showed data from Venture Intelligence, a start-up data tracker.

While Deep Kalra, founder and CEO of MakeMyTrip said the measures related to angel tax will reduce litigation and paperwork.

“For the start-up and entrepreneurial ecosystem in India, there weren’t a lot of substantive announcements barring the proposed easing of angel tax, which has been detrimental to building a world-class start-up ecosystem. The announcement around start-ups not being challenged on valuation to determine angel tax is a welcome move and should hopefully reduce litigation,” he added.

To resolve the so-called ‘angel tax’ issue, start-ups and their investors who file requisite declarations and provide information in their returns will not be subjected to any kind of scrutiny in respect of valuations of share premiums, proposed Sitharaman.

The issue of establishing identity of the investor and the source of their funds will be resolved through e-verification, she said.

“With this, funds raised by start-ups will not require any scrutiny from the income tax department,” she explained in her speech.

The NDA government also proposed to start a television programme within DD’s bouquet of channels, exclusively for start-ups.

“This shall serve as a platform for promoting start-ups, discussing issues affecting their growth, matchmaking with venture capitalists and for funding and tax planning. This channel shall be designed and executed by start-ups themselves,” Sitharaman said in her speech.

Additionally, the budget also proposed to relax conditions for carry forward and set off of losses in the case of start-ups. “I also propose to extend the period of exemption of capital gains arising from sale of residential house for investment in start-ups up to March 31, 2021, and relax certain conditions of this exemption,” said Sitharaman.

Sitharaman also proposed to introduce an income tax rebate of Rs 1.5 lakh for buyers of electric vehicles (EV) and voiced the government’s intent to develop India as an EV-manufacturing hub. She also announced a reduction in customs duty on import of certain parts of electric vehicles.

The government has already moved the GST council to lower the rate on EVs from 12% to 5%.

Additionally, the finance minister announced several measures to streamline labour laws, education, and rental housing segment which will have a direct impact on startups in the country. The finance minister said labour laws will be modernised into a set of “four labour codes” in order to “standardise registration and filing of returns and reduce disputes”.

First Published: Jul 06, 2019 00:17 IST