While the Finance Minister spoke of rolling out an alternative taxation regime for the benefit of VC and the angel investors, no mention of Angel Tax left many disappointed.

Budget 2018 Startups give thumbs up to Digital India Angel tax concerns remain
Atom Union Budget 2018 Friday, February 02, 2018 - 20:09

The startup industry had many expectations from the Union Budget 2018, the biggest one being abolition of or clarity on Angel tax. However, the budget left the startup ecosystem with mixed feelings. While a few feel they may be benefitted through the announcements made for digital India, many others were disappointed at no direct announcements made for the industry.

There was a mention of the Startup India initiative by Finance Minister Arun Jaitley in the budget speech along with proposal to create a new regulatory regime for venture capital funds and angel investors, a national programme for artificial intelligence, hybrid instruments to attract venture capital investment and government wanting to explore applications of blockchain.

These mentions brought some cheer amongst startups, especially the policy on venture capital funds. Ganesh Raju, Partner and Leader startup PwC said, “Separate policy allowing Venture Capital firms to invest in hybrid instruments is a welcome move. Permitting issue of hybrid instruments such as redeemable shares, optionally convertible debentures etc. will enable startup founders to have greater control over the company rather than diluting their stake through equity funding in initial stages.”

Apoorv Ranjan Sharma, Co-Founder & President, Venture Catalysts said that the move will help catalyse the startup ecosystem in India. “The launch of Startup India programme, the building of a robust alternative investment regime and rolling out specially designed taxation regime for VC funds and angel investors, all put together will truly act as a catalyst for the start-up ecosystem in the country. This lays emphasis that the government wants to further support and strengthen the investor community and also establish the angel investment as an asset class.”

Arun Jaitley doubled the allocation for Digital India to Rs 3073 crore, to invest in research, training and skilling in robotics, artificial intelligence, digital manufacturing, big data analysis, quantum communication and internet of things. This could boost startups working in all the above areas with newer business opportunities.

“Allocation of significant fund and announcing efforts to enhance research in disruptive technologies like Artificial Intelligence (AI), Internet of Things (IoT) and Robotics implies that the importance of adoption of such technologies has finally been taken into consideration by the government. With NITI Aayog to establish a national programme for artificial intelligence, this will not only significantly aid job creation but will also assist the government to move towards its Digital India vision,” Aakrit Vaish,  Founder and CEO, Haptik says.

According to Neelesh Talathi, CFO, Pepperfry, initiatives like e-assessments can be a game changer in improving India’s Transparency Index ranking facilitating a further flow of FDI into the country. “We are pleased with the continued emphasis on Digital India including bringing 5 crores of rural Indians online through 5 lakh hotspots or the early investments in newer technology areas like National Programme for Artificial Intelligence or Block Chain Technologies,” he added.

However, the budget failed to address the issue of Angel Tax that has been an issue for startups and investors. When a startup raises angel funding at a valuation higher than its fair market value, it is counted as income to the company and 30% of it is charged as Angel tax.

Several startups raising angel funding from friends, family and domestic angel networks -- not registered with SEBI as Alternative Investment Funds (AIFs) -- have been receiving notices from the IT department. Investors too, have been receiving notices. Both startups and investors were hoping that the budget would give some clarity on the issue.

“The much-awaited abolition of ‘Angel tax’ didn’t find a clear mention in the Budget speech but the FM’s intent on it was crystal clear. He has indicated that VCs and angels are important stakeholders of the startup ecosystem and the government is committed to introduce a friendly regulatory framework in order to boost deal activity and angel funding for the startups. We hope that in the days to come, we will be hearing important developments on this front,” Ajay Ramasubramaniam, Director – India, Zone Startups says.

Bhaskar Majumdar, Managing Partner, Unicorn India Ventures believes that this could impact the angel funding ecosystem in the country. “Angel investors form a crucial part in helping early stage startups grow and reach a critical scale to raise venture capital funds. For a long time, the demand from angel investors like us has been to abolish the angel tax. The voices from the industry bodies and stalwarts individuals reached a crescendo as the countdown to the Budget began. A large section of angel investors were hoping for a significant announcement on this front but the FM has still kept us in suspense. No clarity on removal of angel tax is likely to impact angel funding ecosystem as last year, while we saw deal activity registering an increase, share of angel investments have gone down which means newly launched startups are finding it difficult to raise seed funding. This is likely to have a ripple effect because if new startups won’t get launched, job generation from sector will also take a hit,” he adds.

Ritesh Agarwal, founder of Oyo appreciated the budget, especially the announcements made to benefit MSMEs. He was also among those from India Inc batting for a reduction in corporate tax. “The reduction of corporate tax is a welcome move but we are hoping the limit to be pegged higher than INR 250 crore so as to benefit more corporate entities. We appreciate the measures taken by the government to keep the alarming pollution levels in control. This is a major step towards ensuring the quality of life for citizens,” he said.

Post GST, with most indirect taxes being subsumed, the only indirect tax to get a mention in Arun Jaitley’s speech was customs duty, which was hiked for mobile phones and parts and accessories of televisions.

“To further incentivise the domestic value addition and Make in India in some such sectors, I propose to increase customs duty on certain items. I propose to increase customs duty on mobile phones from 15% to 20%, on some of their parts and accessories to 15% and on certain parts of TVs to 15%. This measure will promote creation of more jobs in the country,” he said in the speech.

Reacting to this, Ameen Khwaja, CEO and Founder of ecommerce website for tech products LatestOne.com said that the move may affect the industry. “Unless we have domestic capabilities to manufacture such products that can be called world-class, we will have to continue to rely on imports. We as a start-up cannot afford to absorb this and may have to pass on the tax burden to consumers directly. This will, in the short-run at least, negatively impact business,” he added.

Several smartphone brands such as OnePlus, Xiaomi, Apple, Oppo, Vivo, Gionee, etc have manufacturing or assembly units in the country and hence may not be adversely affected by the hike in customs.

“Since the announcement of Make in India program three years back, over 85% of smartphones sold in the country are now produced locally. So, this is an opportune time to introduce the next set of regulations to attract investment in the manufacturing sector and establish India as a global hub for electronics. At OnePlus, we are fully committed to the Indian market and welcome the proposed regulations. Currently, all OnePlus smartphones are produced locally and we are already exploring ways to further increase the share of local manufacturing to ensure there is minimal cost impact of any new regulations to the end customer,” Vikas Agarwal, General Manager at OnePlus India says.

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