Prime Minister Narendra Modi’s government is all set to promote and motivate young entrepreneurs of India. Before the official launch of ‘Startup India, Stand Up’ campaign, Modi government has decided to scrap off tax on seed funding for startups provided by Indian angel investors, in the upcoming Union Budget.
The move will help financiers who look forward to support the startup sector of the country.
Here are a few highlights that the government officials spoke about the the development:
- 90% of Indian startups look out for foreign venture capital and angel funds due to indefinite tax
- The tax is levied during the infusion of investments and not at the time of booking profits.As the infused funds are treated as income, in the hands of the startups. Hence, it discourages investments coming from domestic angel investors
- This tax applies only to domestic investors and thus acts as a disincentive to local funding for startups that the government wants to incentivise instead
- On the other hand, returns made by domestic individual investor from their startup investments are taxed at the highest marginal personal tax rate (which is around 33%), while investments routed through a Mauritius-based fund or by corporates who only need to pay long term capital, gains tax of around 10%
According to estimates by the team of officials working on the Start Up India programme, this year, startups received around $9 Bn of funding in the country. The tax treatment and difficulties of doing business in India, as startups scale, has made many startups migrate to countries like Singapore where there are less difficulties in taxation. Around 65% of successful startups, that began in India, have moved out of the country.
It was also mentioned that the tax on angel investments is something that the government is aiming to fix in the upcoming budget, however, the tax levied on income of individual angel investors could not be resolved so soon. The CII pointed out that the tax on investments by angels is particularly unnerving as it could also lead to disputes on the valuation of such investments with tax authorities and scare investors away.
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