Scrapping Of Tax On Seed Funding May Prove To Be A Master Stroke TO Encourage Startups In India


11 January, 2016, New Delhi: It seems like Modi government is marching ahead to promote and motivate young entrepreneurs of India. Just few days before the launch of ‘Startup India, Stand Up’ campaign, the government has decided to scrap tax on seed funding provided by Indian angel investors to startup firms in India in the upcoming Union Budget. This move clearly indicates that the government wants to support the financers who eagerly want to back up startup sector of the country.

In an official statement released by the government, officials stated, “Tax is one of the key reasons that 90 per cent of Indian start-ups are financed by foreign venture capital and angel funds. We have decided to iron out many of the regulatory issues that are deterring access to finance for start-ups and forcing them to look overseas for funding. We are definitely keen to do away with the tax provisions that characterise angel investments into a new venture as the investee company’s income, thus taking away roughly 30 per cent of the investment from the start-up’s cash flow as it is taxed,” reports Hindu.

“Tax applies only to domestic investors and thus acts as a disincentive to local funding for start-ups that the government wants to incentivise instead,” officials added further.

Speaking on the development, R Chandrasekhar, President, IT Industry Body, Nasscon said, “This is not about sops for start-ups, but ensuring equal treatment. Which country in the world taxes its own investors higher than foreign investors?” Industry experts had spoken to the government earlier about the same. As per the investors, taxing the investment is like a double taxation for the investors who may have already paid the tax on their investment.

“By its very definition, angel investing is risky and if a particular investment leads to windfall profits, it must be taxed. But the problem is that tax is levied at the time of investments not at the time of booking profits, so it discourages domestic angel investors who are keen to bet on start-ups as the stock markets are not going anywhere.” Chandrasekhar points out.