Budget 2019: Angel investors are no longer on a sticky wicket
Risk capital investors will breathe a sigh of relief after the finance minister, Nirmala Sitharaman, stated that investments in startups from a more diverse set of funds will now be exempted from the dreaded angel tax, an issue that has plagued the country’s new economy for nearly a decade.
The so-called angel tax refers to Section 56 (2) (viib) of the Income Tax Act, under which the difference between the price at which an investor buys shares of a startup and the fair market value of such shares, was deemed as taxable income.
“This is a good step because the exemptions earlier were restricted to a certain category of Alternative Investment Funds (AIFs). Now any investment made by Category-II funds in startups won’t be construed as income. For a long while, the industry has been pushing for this change,” Rehan Yar Khan, managing partner of Orios Venture Partners, an early-stage fund, told ET.
Binny Bansal, cofounder of Flipkart, xto10x Technologies said, “The FM has taken concrete steps towards breaking the angel tax gridlock. Startups need to conserve their resources and energy towards building and scaling up and not in managing the environment. Promoting the ease of doing business is a central theme; overall, I applaud the business-friendly approach of this budget.”
Category-II AIFs primarily include private equity funds, venture debt funds, real estate funds and funds for distressed assets. This exemption which until now had been restricted to Category-I funds including impact funds, venture capital funds and infrastructure funds — will go a long way in helping newer asset classes invest in startups.
“This goes a long way as Category-II also offers investors a lot more flexibility to invest, not just in startups but also listed companies,” Siddarth Pai, founding partner at 3one4 Capital, an early-stage fund, said.
Terming the decision as long overdue, Rahul Bhasin, managing director, Baring Private Equity, India, said: “Whether it will increase the fund flow and improve the decision-making process is still a question but the measure has cleared the air at least.”
Additionally, Sitharaman said there will be relief for startups from Section 68 of the I-T Act, which deals with identification of investors who back startups. By proposing an e-verification process for investors, the government put the onus on the tax department, rather than on startups, experts said.
“This is something that startups have been looking forward to in terms of ease of doing business,” Pai said.
The finance minister also reiterated that the exemption extended to startups from Section 56 of the Indian I-T Act will safeguard startups and investors who have submitted the requisite information to the DPIIT.
Moreover, to ensure there are no further irritants, the minister made clear that the government will put in place special administrative arrangements to disallow the I-T department’s assessing officers enquiring into the valuations of startups without approval from their superior officers.
Source: ET Tech