The Indian government’s decision to levy ‘angel tax’ on startup founders and angel investors is creating a ripple effect: it is forcing entrepreneurs to register their companies overseas, such as in the US or Singapore.
A recent survey by community social media platform Local Circles and the Indian Private Equity & Venture Capital Association (IVCA) revealed that more than 2,000 startups that got funding from angel financiers, private equity and venture capital funds have received angel tax notices.
Aprameya Radhakrishna, founder of knowledge sharing platform Vokal, who became an angel investor after selling his taxi-hailing company TaxiForSure to Ola for USD 200 million in 2015, said his investments as an angel will come down by 30-40%. In an interview to The Times of India (TOI), he said, “If you are going to treat an honest person as a criminal, then I think they will start looking at avenues...like say, Singapore or the US. These are places which promote honesty.”
There are about 16,000 startups registered with the Startup India initiative. According to Sreejith Moolayil, founder of True Elements, the tax department is not disclosing how many of these startups have been sent tax notices. Moolayil told TOI that as a group they have submitted a list of 120 startups to the tax department and DPIIT, but “the actual number of startups affected would be bigger.”
Arpit Agarwal, principal at Blume Ventures, cited anecdotal evidence to suggest that in the last one year the angel tax introduced by the government has forced around 20-40% of startups to incorporate their businesses in the US or Singapore, besides other countries.
The enforcement of angel tax began in 2016. According to a Tracxn report, the number of seed and angel investments has reduced by more than half, from 1030 in 2016 to 484 in 2018.
The Startup India programme that was supposed to help the startup ecosystem in India has been counterproductive. Rehan Yar Khan, managing partner at Orios Venture Partners, believes if the government really wants the Startup India campaign to bloom then the mindset of bureaucrats must be changed.
Khan told TOI that if one notices how the government is making policies in terms of banning services such as Bitcoin, changing FDI policy in e-commerce and now imposing the angel tax, the Indian bureaucracy and all administrators lack a progressive mindset. At least six portfolio companies of Orios Venture Partners have received tax notices pertaining to angel tax.
The government plans to come up with new set of rules for startups that may ease tax burden but entrepreneurs are not satisfied with such assurances. Binny Bansal, co-founder at Flipkart told TOI, “The current state of affairs is not good enough for entrepreneurship ecosystem in the country. The easier it is for startups to raise angel funding, the more startups we will have…the ecosystem will grow and we will have more successful ventures.”