Union Budget 2015-16: FM Arun Jaitley misses the catch with start-ups

The so called Angel Tax has created a piquant situation for start-ups. To remain out of the purview of Section 56 of the Income Tax Act, a start-up has to be incorporated abroad or it has to raise money from overseas investors.

twitter-logo Taslima Khan        Last Updated: February 28, 2015  | 18:21 IST
FM Arun Jaitley

Assistant editor Taslima Khan
Most start-ups were awaiting Finance Minister Arun Jaitley to say something on the Section 56 of the Income Tax Act which taxes start-ups on investments they receive from angels. Jaitley, however, remained silent on the subject.

The so called Angel Tax has created a piquant situation for start-ups. To remain out of the purview of Section 56 of the Income Tax Act, a start-up has to be incorporated abroad or it has to raise money from overseas investors.

UNION BUDGET 2015-16:Live Blog | Full Coverage

But if there is an overseas investor who is investing in an Indian start-up, then Sec 56 doesn't apply. "It is discriminatory for domestic investors because they are taxed when they invest in local start-ups, whereas overseas investors are not," says Padmaja Ruparel, President, Indian Angel Network, the country's largest angel investor group. Adverse taxation is one of the foremost reasons for technology start-ups moving out of the country and setting up bases in more entrepreneur-friendly countries like Singapore or the US.

Jaitley said that making the flow of technology into the country easier is imperative for technology start-ups. He, however, spoke nothing on making it easier for start-ups to patent new algorithms to enable them to patent it as intellectual property. That is a major pain for tech start-ups in the country and plays a part in the exodus of technology talent from the country.

However, the tax pass through status to be accorded to all private equity and venture capital funds, i.e., Category 1 and 2 Alternate Investment Funds, is a good measure and will encourage more funds being set up, leading to more foreign investment coming into venture funds, and eventually more funding going to start-ups and emerging businesses.

The allocation of Rs 1,000 crore to create a facility to support all aspects of start-up businesses, including incubation, is a welcome move. Though, it actually doesn't mean much if you compare it with last year's announcement of setting up of a nationwide incubation facility for start-ups. Also, the government had announced setting up a Rs 10,000 crore fund for start-ups but nothing has moved yet on that front.

The Finance Minister should have said things about where will the fund pool come from, how this will be utilised, which institution will be responsible for implementing the incubation facility, etc. There is a lot of vagueness on whether the government plans to set up new incubators or strengthen the existing ones. Will it invest directly in start-ups or act as a fund of fund for other angel and venture funds across the country. That needs to be clarified. Likewise, last year, the government also announced setting up a high level committee to monitor fund-flow to the micro and small enterprises. But we are not sure whether the government still has any knowledge of whether things have moved on that part.

"Ease of doing business" is something that resonated several times in this budget speech. The initiative to set up a comprehensive bankruptcy code as per global standards to promote ease of doing business is commendable. It is particularly relevant for start-ups because a majority of them fail. "The measure will help them shut shop faster and move on in life," says Ruparel.

Other announcements like setting up a separate bank, i.e., Mudra Bank, with an allocation of Rs 2,000 crore for microenterprises primarily in the SC/ST categories is welcome. It is intended to work as a re-finance agency for micro units. Given that there are about 57,700,000 sole proprietorships running small manufacturing units, most of them having no access to formal modes of financing, this can be a boon, provided the execution goes through well.

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