In the lead-up to the Union Budget, the Ministry of Commerce and Industry has once again advocated for the removal of the so-called “angel tax,” arguing that it hampers the growth of India’s start-up ecosystem. Rajesh Kumar Singh, Secretary of the Department for Promotion of Industry and Internal Trade (DPIIT), emphasized the need for this change on Thursday.
The Angel Tax Dilemma
Introduced in 2012 via Section 56(2)(viib) of the Income-Tax Act, the angel tax was intended to deter the use of unaccounted money through the subscription of shares in a closely held company at a value higher than the fair market value. However, the start-up community has long contended that this tax misinterprets the nature of startup funding. Investors typically fund startups based on their future potential rather than their current market value, leading to discrepancies that are often mistaken for money laundering.
“The valuation differences cited by the government are not signs of money laundering. Investors base their funding decisions on future potential,” industry representatives argue. They add that taxing the difference between the issue price of unlisted securities and their fair market value (FMV) has stifled funding for many startups.
Legal Battles and Valuation Methods
Despite the tax department’s efforts to relax valuation methods for non-resident capital infusion in startups, the pressure has only intensified. Many startups have moved to court, challenging tax demands and the methods used by tax authorities to alter or dispute valuations. Past tribunal and court rulings have favored startups, stating that tax authorities have no right to change valuations provided they follow notified options.
The ongoing legal battles highlight the urgent need for clarity and reform. Startups argue that the angel tax, as currently implemented, is a significant hurdle to their growth and sustainability.
Inverted Duty Structure: A Hindrance to Local Manufacturing
Another critical issue raised by the DPIIT for the upcoming budget is the inverted duty structure, where import duties on inputs are higher than those on finished products. This discrepancy incentivizes imports over local manufacturing, contrary to the government’s Make in India initiative.
Various industry associations, particularly in the electronics sector, have voiced their concerns about this structure. “Taxes on inputs should be reduced over time,” Singh noted, indicating that the Ministry of Electronics and Information Technology and the Finance Ministry would need to address this issue.
National Deep Tech Start-up Policy on the Horizon
In addition to addressing the angel tax and inverted duty structure, the government is set to introduce a National Deep Tech Start-up Policy (NDTSP). This policy aims to boost early-stage technologies and their commercialization, providing much-needed support to startups working on cutting-edge innovations.
The final draft of the NDTSP is ready and may soon be presented to the Cabinet for approval. This policy is expected to create a more conducive environment for deep tech startups, helping them navigate the challenges of early-stage development and commercialization.
Looking Ahead: The First Budget of the NDA’s Third Term
As the National Democratic Alliance (NDA) government prepares to present the first budget of its third term on July 24, the recommendations from DPIIT highlight the critical issues that need to be addressed to support India’s burgeoning startup ecosystem.
Key Recommendations:
- Removal of Angel Tax: Aimed at reducing the burden on startups and encouraging investment based on future potential.
- Addressing Inverted Duty Structure: Necessary to promote local manufacturing by lowering import duties on inputs.
- National Deep Tech Start-up Policy: To support early-stage technologies and their commercialization.
Implications for Startups
The removal of the angel tax could lead to a surge in investments, providing startups with the necessary capital to scale their operations. Addressing the inverted duty structure would incentivize local manufacturing, aligning with the Make in India initiative. Meanwhile, the National Deep Tech Start-up Policy would offer targeted support to startups working on advanced technologies, helping them overcome early-stage challenges and achieve commercial success.
In summary, the recommendations from DPIIT, if implemented, could significantly boost the startup ecosystem, paving the way for increased innovation, investment, and economic growth in India.
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Conclusion
The upcoming Union Budget presents an opportunity for the government to make significant strides in supporting the startup ecosystem. By addressing the angel tax, inverted duty structure, and introducing the National Deep Tech Start-up Policy, the government can create a more favorable environment for startups to thrive.
The recommendations put forth by DPIIT are crucial steps toward realizing the potential of India’s startups, driving innovation, and fostering economic growth. As the budget announcement approaches, stakeholders across the startup ecosystem will be keenly watching to see how these issues are addressed.