Startup Bodies Seek Exemption in Tax Policies

Prominent startup industry bodies including Indian Angel Network, NASSCOM, Indian Venture Capital Association, TiE and Mumbai Angels have jointly appealed to the government to review taxation policies that adversely impact the startup ecosystem.

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"Startups have been facing practical difficulties on the taxation front following the blanket applicability of certain sections. We have made a representation to the government on January 16 regarding this," Saurabh Srivastava, prominent venture capitalist, and co-founder of Indian Angel Network and told reporters here.

What does Section 56 say?

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Section 56 of the Income Tax Act presently states that money paid by investors for shares in a private Indian company will be subject to 33% tax. Strategic investments are generally long-sighted ones and taxing a hefty amount at the initial stage could make investors think twice before investing.

"Normally, valuations in the angel round of funding are based on long-term expectations of the startup succeeding. Taxing these early stage investments is detrimental to their performance," said Mr. Srivastava.

What are the expectations?

Investors would love more benefits for themselves. A broader section should be carved-out exclusively for them in Section 56 which will take care of their needs.

Startups have also appealed that the government should also consider eliminating Minimum Alternate Tax for startups, which are DIPP certified.

Streamlined laws to encourage startup ecosystem.

An Economic Survey for 2015-16 says the Indian venture capital backed companies topped $12 billion across more than 1,220 deals in the past two years.

"The size and importance of such funding have been huge in the past few years and the government has done well to recognize that. It is important that they now ensure streamlined laws to encourage the ecosystem," Rajat Tandon, president of Indian Private Equity and Venture Capital Association said.

Support from NASSCOM

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NASSCOM had previously said that direct and indirect taxes hurt startups and the industry body had asked for tax exemptions for startups. Policy regulations like ease of compliance, reliance on self-certification instead of audits, tax exemptions were some of the suggestions made by NASSCOM.

Conclusion

It has been a while since startup bodies have been lobbying around for flexible taxation norms. The laws regarding capital gains should be simplified further to boost investment among startups. In the upcoming budget, government should consider the recommendations to relax taxes including minimum alternative tax and angel tax that hurt growth of startups.

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