Tax weighs down startup sprint
One of the central government’s flagship schemes, Startup India has had a rather mixed run so far. While the initiative has seen a host of benefits extended to startups across India and resulted in a sharp rise in the number of startups recognised, a strong push by the government has not completely offset the impact of institutional red-tape and the oft-decried angel tax.
Launched in 2016 by Prime Minister Narendra Modi, the initiative has resulted in the government instituting several relaxations in investment and taxation regulations for startups over the last three years. According to available government data, since its launch, over 15,113 startups have been recognised under the programme with the government claiming that around 1,48,897 jobs have been created by these units.
But, many founders say that they have struggled with documentary hurdles and funding issues arising from the angel tax provision — which seeks to levy a duty on capital raised by these firms.
For instance, according to Pranav Maheshwari, co-founder of hospitality startup Vista Rooms, the community still grapples with issues from Angel Tax. Another food startup founder told this paper that “slow process of registration, draconian law and Angel Tax terror has forced many young entrepreneurs shift their base to Singapore”.
Officials in the Department for Promotion of Industry and Internal Trade (DPIIT) agree the results have not been as good as expected, but note that a lot has been done.
“We agree that the progress has not been according to our expectations, yet we have been able to create a conducive ecosystem for startups. So far, the government has made 22 regulatory amendments over the last one year,” a senior official from the DPIIT told this paper.
What has disappointed startups the most, however, has been the revenue authorities’ efforts to tax their fund-raising efforts. The DPIIT has acknowledged the issue, with the department reaching out to many startup companies and investors after they took to social media to protest alleged incidents of tax harassment and Income Tax notices sent to them under Section 56(2) of I-T Act.
The Section provides that an amount raised by a startup in excess of its fair market value would be deemed as income from other sources and would be taxed at 30 per cent. In February, the government amended norms to expand the number of startups exempted from the Angel Tax levy, but issues still remain for many.
“In our interactions, most of the startups have complained of harassment by tax sleuths. This has damaged the funding process. We raised their concerns regarding the angel tax which was going against the spirit of the Startup India initiative,” another official from the DPIIT noted.
Apart from these issues, the programme has done one thing well -- engaged state governments in buttressing the startup ecosystem.
A report by the Department of Industrial Policy and Promotion noted that before the programme was launched, only four states had policies dedicated to startup welfare.
“The national priority initiative has led to a widespread movement across the country and presently 22 States have their own Startup policies. Many other States and Union Territories (UTs) are in the process of drafting their policies and operating guidelines,” the December 2018 report noted.
State governments have also increased support to enabling ecosystems, with the DIPP stating that more than “70 incubators with incubation area of around 10 lakh sq. ft. have been supported by State Governments since the start of Startup India initiative”.