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Budget 2021 Expectations: Angel Tax norms should be further eased to benefit startups, say experts

Financial Express |

19 January 2021

Union Budget 2021 Expectations for Startups: Angel Tax is levied on non-DPIIT registered startups receiving investments from angel investors if the consideration for the issue of shares exceeds the Fair Market Value (FMV) of such shares.

Union Budget 2021-22 Expectations for Startups: Recovering from a bleak 2020, players in the startup ecosystem have been a hopeful lot ahead of the budget. The key asks by the startups and experts have centred around broad themes of tax relief and enabling more engagement between fintech startups and banks & other financial institutions to support other sectors through organised lending. Arguably, the controversial Section 56(2)(viib) of the Income Tax Act, also known as Angel Tax, was the biggest hurdle for not just fintech startups but across sectors. While the government has already reprieved startups registered with the Department for Promotion of Industry and Internal Trade (DPIIT) from the 30 per cent Angel Tax but there’s more to it to be addressed, according to experts.

For instance, Angel Tax doesn’t exempt startups that have invested in residential or non-residential land and building other than used by the business itself, loans and advances unless the startup is in the lending business, capital investment in any other business, purchase of shares, and securities and others. “There should be an exemption from the restriction of investing into shares and securities and capital contribution to other entities to avail the Angel Tax benefit. This will provide contentment to startups in utilising their funds,” Santosh Maheshwari, Partner – Transaction Tax, BDO India told Financial Express Online.

Angel Tax is levied on startups receiving investments from an angel investor if the consideration for the issue of shares exceeds the Fair Market Value (FMV) of such shares. The valuation of early-stage or angel level startups is derived by investors using the discounted cash flow method as it involves projecting cash flows of the company in the future that may or may not be achieved by the company. However, the tax authorities value the company on its current business, which remains way less than what investors ascribe understanding the future growth of the company.

Moreover, for startups, “angel investing norms can be broadened to include debt investing in startups as the startup ecosystem matures in India,” Anurakt Jain, Founder & CEO of growth capital provider Klub told Financial Express Online.

Startups working with financial institutions and banks are looking at enabling policies to strengthen their engagement on different fronts such as lending, digital services, and more. For example, ToneTag, which uses encrypted sound waves to make offline, proximity-based contactless payments on any device, seek “fiscal policies that encourage banks and financial institutions to work more closely with their Fintech partners to expand their digital service suite and integrate Fintech to provide end-to-end processing instead of piecemeal service,” Kumar Abhishek, CEO and Founder, ToneTag told Financial Express Online. The company had partnered with Yes Bank, Infosys Finacle, the UAE’s First Abu Dhabi Bank, FreeCharge, HDFC Bank, Mastercard, and more to offer sound0based payment acceptance service.

Likewise, to support small businesses and startups with growth capital, Klub seeks policies to “ease credit flow through fintechs to MSMEs and startups. It would provide a significant push to startups if the regulator could include startups registered with DPIIT as a priority sector for lending,” added Jain. The balance-sheet focused products don’t work for startups, most of which are asset-light. Hence, the government should look at pushing “cash-flow focused lending products that can also be adopted by the banks. This, in turn, will also make the customer database of banks available to the fintech companies.”

Lending startups, which are engaged in business-to-business lending, have MSMEs as their majority customers who otherwise do not meet the eligibility criteria of financial products offered by traditional banks and NBFCs due to lower incomes or lack of well-defined credit histories. For startups engaged in offering digital financial services including lending seek, “adequate concessions like low-interest credit to work on the technology and help spread it to India’s 60 million small business owners. The budget should also allocate funds to R&D in the fintech space so that advanced technology can be built indigenously and help support the Government’s vision of AtmaNirbhar Bharat,” Vipul Sharma, Founder and CEO of small business-focused neobank Chqbook told Financial Express Online.

Google had recently taken down several loan apps from Play Store “based on flags submitted by users and government agencies.” It said in a company blog post. “Google Play Developer Policy requires financial services apps that offer personal loans to disclose key information such as the minimum and maximum periods of repayment, the maximum Annual Percentage Rate, and a representative example of the total loan cost. To help further ensure that users are making sound choices, we only allow personal loan apps with full repayment required in greater than or equal to 60 days from the date the loan is issued,” it had said.

The announcement was made a day after the Reserve Bank of India announced setting-up a Working Group to regulate digital lending amid “recent spurt and popularity of online lending platforms/ mobile lending apps (‘digital lending’) has raised certain serious concerns which have wider systemic implications,” the RBI had noted.