Don't Startup India
Angel tax, non-starter government initiatives have hurt the booming Indian startup ecosystem and dreams of several young entrepreneurs and investors
Four years ago, a startup founder, received some crucial funds from a family friend. As is the unsaid norm, the first step to raising seed capital is to approach family and friends. And that is exactly what the enterprising wannabe entrepreneur did. The Rs 5 lakh that he received from the angel investor was not excessive but just enough to help him tide over immediate needs. As the years went by, the startup only grew from strength to strength, expanding its team and footprint. The startup went onto raise further funds to realise its goals. Last month though, the angel investor (that well-meaning family friend who had dared to believe in the young wannabe entrepreneur) received a notice from the taxman.
A jolt from out of the blue that shocked the startup founder too, who was now expected to cough up almost 30 per cent of his funding as income tax. A copy of the angel investor's bank statement, source of the funds that were invested and a copy of his Income Tax Returns were demanded by the Deputy Commissioner of Income Tax. All of these had to be speedily dispatched to his office within two days. Even though in April last year, the government had agreed to exempt startups under Section 56 of Income Tax Act if investments were under Rs 10 crore, the taxman had come calling.
Similar government notices reached the doorsteps of several startups. The draconian 'Angel Tax' had long been in the news last year. But after several assurances from the finance ministry and the Department of Industrial Policy and Promotion (DIPP), most concerns had been put to rest. But as 2019 beckoned, the taxman had rattled the entire startup ecosystem that was caught unawares. Even though the government had promised no 'coercive action', demand notices citing the exact amount of tax due continued unabated. After scores of tweets and messages of shock, disbelief and anger, industry stalwarts and PE-VC bodies swung into action to interface with various government departments. They are now trying to smoothen ruffled feathers on both ends of the spectrum. But the question remains, even after assurances from the government, why is this even happening?
Exactly three years ago, in 2016, Prime Minister Narendra Modi announced the Startup India programme with much fanfare. The industry was exuberant and it seemed like the beginning of big things for the startup ecosystem that was booming in India. While startups in the country have done exceptionally well and attracted big monies from domestic and international venture capital and private equity funds, the government's own initiative has been a bit of a damp squib.
Take, for instance, the government's startup-focused Credit Guarantee Fund (CGF) announced by the PM and meant to encourage 7,500 startups, which has so far been a non-starter. In a written reply to a question in Lok Sabha, Minister of State (MoS) for Commerce and Industry C R Chaudhary confirmed that the fund with a corpus of Rs 2,000 crore is yet to become active. An additional Rs 15,000 crore was to be pumped into this corpus to allow government-recognised startups to benefit from collateral-free funding. The unsavoury truth is that not a single startup has received funding from CGF.
So far, 14,036 startups are a part of the Startup India initiative but some of them who are, say that they are yet to truly benefit from signing up. The 'Fund of Funds for Startups' (FFS) worth Rs 10,000 crore that was set up at Small Industries Development Bank of India (SIDBI) for Alternative Investment Funds (AIFs) has funded 170 startups till date and allocated only 19 per cent to VCs in three years! A snail's pace of progress for a thriving startup ecosystem.
Small and mediums enterprises (SMEs) are the backbone of a growing economy. However, access to capital for most is a turbulent experience. Banks want collateral or exponential revenues, both of which are impossible for fledgling entrepreneurs. The government's startup initiatives were supposed to improve the access to capital and simplify ease of doing business for new entrepreneurs, but they are yet to take off. Now, with elections around the corner, we hear of better GST laws and greater exemptions for SMEs. While these are welcome moves, will they heal the wounds of the last four-and-a-half years?
(The writer is a journalist and media entrepreneur. The views expressed are strictly personal)