The highly anticipated Union Budget 2018 has left startups disenchanted. Startups across the country were hoping the budget would address the issues faced by them and meet their various demands. Their biggest hope was that the Union Budget would finally abolish the Angel Tax.

But the spirits of startups and investors were lifted with the government’s plans to devise new measures to create a more conducive environment for the growth of venture capital funds and angel investors who have been investing in startup ecosystem in the country. Jaitley’s announcement, however, did not proffer any clarity as to the measures being proposed by the government in lieu of this.

“Venture capital funds and angel investors need an innovative, special development and regulatory regime for their growth. We have taken a number of policy decisions including launching of the startup in India program building a robust investment … taxation regime. We will take additional measures to strengthen the environment for their growth,” Jaitley said in his speech.

The angel tax clause was introduced in the Income tax act in the 2012 Union Budget. Under this, Investments that startups receive from angel investors, in excess of their fair market value, are currently being taxed at the whopping rate of 30 per cent. Under the section 56 of the I-T Act this clause specifically states that all startups are liable to pay the taxes on money invested as capital, including on angel fund received. According to NASSCOM, this tax has led to a 53 per cent drop in angel funding during the first half of 2017. A petition was initiated on the Change.org platform against the imposition of the angel tax, in the days leading up to the Budget announcement.

The angel tax has gained a reputation for driving away initial investors from startups and has become a deadweight for them as the angel investments are stepping stones to bigger investments from Venture Capital firms. Although the tax was introduced as a measure to rein in undisclosed income, the government has unintentionally given startups a major hurdle to raising investments.

“What is happening is that startups which are growing to an MSME stage are being taxed for the investment they have raised painstakingly raised,” said Sreejith Moolayil, Founder of True Elements and who initiated the online petition. “There has been absolutely no announcement made on Angel Tax or Section 56 and 68, which is a big letdown. Expecting startups to become MSMEs in this kind of environment is plain wrong.”

In addition to this, the angel investors have also been demanding clarity over the issue of fair value pricing.  The issue revolves around the existence of arbitrary ways of calculating the fair value of the company, since the value of a company depends on numerous factors and different entities can calculate it in different ways resulting in multiple valuations of the same company. Furthermore, since last year, a number of startups have reported facing unfair scrutiny from the Income Tax Department over valuations at which capital was raised from angel investors.

However, all things considered, the Co-founder of IAN Saurabh Srivastava believed that there are some positives to the announcements made.

“To be honest, we were not expecting anything more than this on this sector because the focus of this Budget was somewhere else,” he said. “It did recognise the role angels and alternate investment funds play in providing capital for growth and innovation, and to this end, they are being open to further discussions, which is good,” he said.

Furthermore, it was announced that Niti Aayog will establish a National Programme to direct the efforts in the Artificial Intelligence space toward national development.  This would largely focus on R&D and its applications.

“We are not only focusing on ‘Ease of Doing Business’ but also ‘Ease of Living’,” said Finance Minister Arun Jaitley in his Budget Speech. In addition to this, the Finance Minister also announced that the government will introduce measures to aid the expansion of fin-tech startups in order to make it easier for small and medium enterprises to access capital.
However, with the agricultural, health and education sectors receiving a major portion of the budgetary allocation in this year’s Union Budget, it seems that the appeals and demands of the startup industry seem to have fallen behind.

(Picture courtesy: Livemint)