Big Boost for Indian Startups – Draconian Tax On Seed Funding Will Be Abolished


Entrepreneur Happy Startup

It may seem sound ironical, but India is most probably the only country in the world where startups are taxed for receiving seed funding. As per various estimates, 90% of those startups which chose foreign angel investors for receiving seed funds do so to avoid this draconian startup tax.

In a major reform for encouraging entrepreneurs and to push ‘Startup India’ vision, Indian Government is all set to abolish this tax on startups and angel investors for seed funding. This will prompt new entrepreneurs to set up base in India, and help Indian economy to flourish and develop.

It is expected that this announcement will be made during the upcoming ‘Startup India, Standup India’ conference and the changes would be officially recognized after the Union Budget – 2016 is announced.

India Killing Their Own Startups?

As per existing tax laws of the country, any angel investment done by local investors is treated as an ‘income’ for the startup, thereby making it taxable.

But the reality is that, such seed funding is extremely risky and there is no guarantee that any income will be churned out in future. Thus, as of now, besides taking the risk of the startup idea, investors & entrepreneurs also had to deal with tax in order to push an idea. But now, this will be a thing of past.

Two Government officials spoke with The Hindu, and they said, “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,”

It seems that such tough and strict tax laws washed away upto 30% of the seed funding, which severely hampered the young startup’s growth equations. This fear led to entrepreneurs opting for foreign destination for seeking seed funding.

The officials added, “We are definitely keen to do away with the tax provisions that characterize 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,”

Will It Help To Stop Exodus of Startups from India?

Industry secretary Amitabh Kant recently shared that 65% of successful Indian startups move to foreign locations within 3-4 years as their tax structure is refined and friendly towards the entrepreneurs and investors.

We had earlier reported why Grofers and other successful startups have moved out of India to capitalize on low tax rates and to use a platform for easier expansion. We have even shared 10 reasons why destinations such as Hong Kong and Singapore are more startup friendly compared to India.

It seems that Indian Government wants this exodus to stop immediately as we are not gaining anything, but losing everything due to such strict tax laws.

Nasscom President R. Chandrasekhar 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?”

As rightly pointed out by Confederation of Indian Industry (CII), the tax on seed funding is levied at a time when the investors and entrepreneurs have made out an arrangement based on understanding and mutual respect regarding the vision and idea of the startup. There is absolutely no assurance of profits but still tax laws of India make it mandatory to pay tax on such seed funding.

In a note, CII said, ““At the stage that angels invest, start-ups have no revenue or profits and the valuation is based on the potential and promise of the idea and is usually a simple negotiation between founders and angel investors. The IT department would not have the domain understanding to value the innovation…This will subject all investments in start-ups to re-evaluation and will open a plethora of disputes,”

Besides tax of seed funding, there are other various issues related with startups as well, which would hopefully get resolved soon for Indian entrepreneurs. R. Chandrasekhar aptly said, “The tax treatment is only the symptom of the larger malady. The talent for start-ups is here, value is added here, so why should this value and the taxes it could yield go out of our national accounts books and accrue to some other country,”

When we reported last week that DIPP has declared that FDI in marketplace e-commerce for B2C is not recognized by the Govt., then an interesting question came up: Do we really need FDI in India? In case startups are encouraged in India, and tax reforms are introduced, then our local investors are actually more than capable to unleash a new wave of entrepreneurial progress in India.

And this decision to scrap tax on seed funding is one of these great moves. Kudos to Indian Government; and more power to Entrepreneurs and Investors!

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  1. Kiran Navaratna says

    What is the status of this as of today, 16 March 2016?
    Should someone hoping to take in seed capital wait till 1st April 2016 to take in seed money?

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