TiE, NASSCOM, IAN, IVCA Form Startup Coalition To Assist Govt In Process Streamlining

TiE, NASSCOM, Indian Angel Network and Indian Venture Capital Association have joined hands to form a startup coalition to draw attention to the difficulties faced by the Indian startups. The coalition will also assist the government in streamlining the entire process.

The coalition was launched in a press conference held in Mumbai today, addressed by Saurabh Srivastava (Chairman Emeritus – TiE Delhi); Nishith Desai (TiE Mumbai Board Member and Founder, Nishith Desai Associates); Rajat Tandon ( President IVCA); Chandni Jafri (CEO Mumbai Angels) and Naveen Raju (Executive Director – TiE Mumbai).

The panel, in view of the impending budget to be announced on February 1, 2017, also put forward a note about the impact of certain tax issues on startups.

These were:

1- Startups need more investment – There is a growing concern about the issuance of notices to startups by the Income Tax department seeking to tax the premium paid by angel or venture capital investors while funding startups.

2- Impact of Section 56 and 68 of the Income Tax Act – Section 56 of the Income Tax Act (ITAct) was intended to curb the use of black money for investments into private companies with a view to making them appear as white money. Under this section, money paid by investors for shares in a private Indian company will be subject to a 33% tax to the extent it is more than the Fair Market Value (FMV), as it is deemed to be income from other sources in the hands of the company.

The Coalition has recommended to carve out angel groups and benefits for venture capital funds to be made broader. The coalition also suggested that the carve out for investments into startups under Section 56, currently, is too narrow. And that the definition of startups covered under Section 56 can be expanded to reflect commercial realities.

As part of fostering a greater business environment for startups, the carve outs for angel groups and venture capital funds shall also extend to other kinds of income tax. Other recommendations by the coalition are-

1. Short-term capital gains for startup investor should be 15% and the holding period for computing long term capital gains tax should be 1 year.
2. Moreover the ‘Angel Tax’ valuation  under Section 56 of the Income Tax Act, which enables the revenue to consider the Full Market Value (FMV) as the full value of consideration if the FMV exceeds the full value of consideration for the purposes of computing capital gains tax is onerous and should be done away with.
3. The government should also consider eliminating Minimum Alternate Tax (MAT) for startups which are Department of Industrial Policy and Promotion (DIPP)- certified startups.
4. Employee Stock Option Plans (ESOP) taxation to be tied to liquidity, not vesting or pre-liquidity exercise.