India: The budget 2018 – why Angel Tax should only be levied on non-accredited investors
The last Budget before the 2019’s Lok Sabha elections is just a few days away. The entrepreneurs and investors are eyeing the Budget in hopes that the government should address the major issue of angel tax.
There are a few ways in which the government can address angel tax.
Accreditation of angel investors
Investment sector is easily accessible and is free for all, so anyone and everyone is welcomed in the sector. However, this very scenario has given rise to the attempts to dispose of the undisclosed income. One of the methods to address the situation is formulating the guidelines for the accreditation of the angel investors, as in the absence of guidelines distinguishing between the genuine investors to the rest very difficult. An angel investor should also help in mentoring the startup and the entrepreneur, and due to the little knowledge about the industry, most of the angel investors are not capable of carrying out the task of mentoring. A specific set of guidelines or rules will help to eradicate the investors who are not genuine.
The government should make provisions to exempt genuine angel investors who get certified through the accreditation process from the tax; angel tax should only be levied on the non-accredited investors. This will help in cleansing the angel investment sector by only allowing the genuine investors to invest in the startups. One caution here is that this should not be retrospective, but implemented from next financial year with a plan in place for the same.
One of the principals in taxation is to ensure that any entity or individual is taxed only if it is capable of paying tax. Startups generally take at least a couple of years time to reach revenue and taxing them prior to the same will not only be dangerous but also further increase the time to positive cash flow. Rather, the government must offer a framework that gets them to revenue making faster and gives them the ability to pay tax on income generated out of profits.
One option to implement the above is what is followed in direct tax – having a slab based system in place. The tax department can define the minimum threshold for annual profits for a startup beyond which it would fall under the purview of angel tax. Also, it can further have a slab structure where the tax increases as the profit threshold increases.
This will address most of the draconian features of angel tax and will also bring equalisation in opportunities.
The government’s initiatives for the startups are applausable; however, there is still a scope of learning from the developed nations. Most of the developed nations have already addressed the issue of angel tax by offering the angel investors tax breaks.
Most of the European countries and UK provide this incentive to the angel investors and entrepreneurs, it is one of the better solutions to tackle the tricky issue of angel tax; hence, the government should look to follow the footsteps of those countries. These incentives were offered only for a few years. Such incentives are necessary as angel investment is one of the riskiest investments. It will kick start the start-up investments and expand angel investment as an asset class.
The government needs to realise that angle tax cannot be a blanket rule for the entire ecosystem. There has to be enough and appropriate deliberation and discussion that involves all the key stakeholders. However, it is still to be seen what comes out of Pandora’s Box.
Vice President, Cross Border Angels