No more Angel tangle: Start-up pain points get soothing touch

Finance minister Nirmala Sitharaman's debut Budget may have appeared insipid for the start-up community, but it did provide a much-needed respite that these firms and early-stage (seed and angel) investors had been looking for some time now.

"With the easing of angel tax regulations, the government has not only heeded to what the industry was gunning for, but also got in the right set of checkpoints to ensure the right kind of money is coming in," said Gotama Gowda, co-founder and chief executive officer at smart-lock maker Openapp.

Newly established companies can finally heave a sigh of relief as the cash burn in the initial stages of a set-up won't be an opportunity loss anymore. The enabling provisions to carry forward losses will ensure that deferred tax assets can now exist in the financial statements, thereby boosting valuations.

"The finance minister has ring-fenced the start-up arena by providing certainty over angel tax issue and creating special administrative arrangements for grievance redressal. This will provide booster dose to mature start-ups who have crossed bootstrapping stage and are now attracting investors at robust valuations," said Rajiv Chugh, partner and national leader - policy advisory and speciality services, EY India.

Early stage funding is a critical requirement of start-ups and angel tax has been a pain point for both investors and start-ups alike. In simple words, it gave the authority to the tax department to question the share premium paid by investors and potentially tax the amount which was above the fair market value as other income at a marginal rate of 25%.

"With the new provisions, it seems that as long as investors declare their investment and the start-ups also file this in their returns, they will not be subject to scrutiny for the computation of share premium. While details are awaited, this would mean any start-up registered with 'Startup India' and has filed the necessary documents will be exempt from Angel Tax," said Sushanto Mitra, founder and chief executive officer, Lead Angels.

Additionally, the tax exemption on capital gains, said Sanjay Mehta, private investor, Mehta Ventures, is a super move that will now provide an alternative investment opportunity for high networth individuals who sell properties and fund start-ups. "This exemption should have been also applicable to investors in Securities and Exchange Board of India-registered angel funds as the money would be channelled into start-up investments only."

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. Also, e-verification will be used to establish the identity of the investor and source of their funds and funds raised by start-ups will not require any kind of scrutiny from the income tax department.

"However, it stays quiet on reducing the compliance burden including number of registrations, returns and filings for start-ups. It needs to go towards exemptions from PF, ESIC, professional tax, single annual TDS and MCA return and a single-window NOC for quick closure," said Rishi Agrawal, chief executive officer, Avantis Regtech Pvt Ltd.

Also, start-ups will not have to justify fair market value of their shares issued to certain investors, including Category-I Alternative Investment Funds. This benefit has now been extended to Category-II AIFs as well. The Category I AIF are AIFs that invest in a start-up, early stage ventures, social ventures, micro, small and medium enterprises, across sectors, areas that the government or regulators consider as socially/ economically desirable. Such investors include venture capital funds, SME Funds, social venture funds, infrastructure funds and such other AIFs as may be specified.

The Category II AIFs, according to Sandeep Sehgal, director – tax and regulatory, Ashok Maheshwary & Associates LLP, are AIFs which do not fall in Category I and III and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted in the SEBI (AIFs) Regulations, 2012. "Various types of funds such as real estate funds, private equity funds (PE), funds for distressed assets, etc. are registered as Category II AIFs," he said.

The start-up community has been facing a number of challenges on tax scrutiny, valuation and assessments. Darshan Upadhyay, partner, Economic Laws Practice, said, "The recommendation to extend the benefit of not requiring to justify fair market value to Category II AIFs and reduce administrative challenges including for pending assessments is much needed imitative to continue the traction in start-up space."