Government chooses to favour infant firms over dwarfs in Budget proposals

The fact that the tax sleuth will have to take approval of a supervisor before initiating scrutiny will reduce instances of harassment of startups and venture capitalists in the name of Angel tax.

Published: 13th July 2019 08:46 AM  |   Last Updated: 13th July 2019 08:46 AM   |  A+A-

Finance Minister Nirmala Sitharaman

Finance Minister Nirmala Sitharaman (Photo | PTI)

By Express News Service

“It is better to help the infants rather than dwarfs,” said Chief Economic Advisor KV Subramanian while releasing the Economic Survey 2019 recently. His views were fully endorsed in the Union Budget 2019-20 as the Centre decided to be generous with the ‘infant’ start-ups rather than supporting micro, small and medium enterprises that refuse to grow. 

Angel tax was a major concern for start-ups earlier. However, Finance Minister Nirmala Sitharaman, in her maiden budget speech, has announced that start-ups and their investors will not be subjected to any kind of income tax scrutiny on their valuation if they are verified by the government. Further, the government said it will create a separate committee to administer issues they face due to this tax.

The move was widely welcomed by start-ups as the matter will no longer be a topic for subjective interpretation by an assessing officer. The fact that the tax sleuth will have to take approval of a supervisor before initiating scrutiny will reduce instances of harassment of startups and venture capitalists in the name of Angel tax. “To resolve the much criticised ‘Angel tax’ regime, the budget announced no scrutiny with respect to valuations of share premiums for start-ups and investors who file requisite declarations and provide information in their returns.

The Angel tax was introduced in 2012 to stop small companies from being used in money laundering. This ended up putting severe regulatory pressure on early-stage startups which issued shares at a significant premium to fair value,” said Propeluss, a startup deal platform of Equirus Capital. Another major takeaway for startups was that portfolio firms of alternative investment funds (AIF) CAT II will no longer be required to justify valuations they receive from their investors. This is in line with the long pending demands by the Venture Capital (VC) industry.

“The government proposed to rationalise and streamline the existing KYC norms for foreign portfolio investors to make it more investor-friendly without compromising the integrity of cross-border capital flows. This will hopefully help make the experience of securing capital from foreign institutional investors more hassle-free for startups,” Propeluss added.

The government has also taken initiatives to attract investment from VCs in startups in new verticals like electric vehicles, education, FinTech and payment systems. This coupled with changes across labour laws, education and rental housing will have a direct impact on startups. Meanwhile, the government has also announced to start a new TV programme on Doordarshan to promote startups. The programme will feature discussions on challenges faced by them, fund-raising, access to venture capital funds and tax planning, among other things.

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