In a first of its kind step, trade associations and venture funds including TiE, NASSCOM, Indian Angel Network and Indian Venture Capital Association have come together and formed a startup coalition to draw attention to the difficulties faced by the Indian startups and to assist the government in streamlining the entire process.
The coalition was formed in the wake of the recent impact of blanket applicability of certain tax sections, which according to them, have led to a lot of practical difficulties for startups on the taxation front.
The Income Tax Dept had last month issued tax notices to about 100 startups, who had witnessed a marked round valuation, on the grounds that the first premium received by these companies was more than their fair market value (FMV). Startups who received the notice were told to shell out 33% tax on the premium by March 31 or challenge the order in the court of law.
Normally, valuations in the angel round are based on the long-term expectations of the start-up succeeding. However, recent actions of the IT department of sending out notices disputing valuations on the premise that valuations done at the angle funding level are way above those done at a subsequent time have been hampering the overall Balance Sheets of start-ups,” the coalition said in a statement.
While terming the tax notices as “a retrograde step”, the coalition said argued that this “will result in the immediate reduction of available funds in the hands of struggling Indian startups and lead to a decrease in the flow of funds from future rounds of investment due to this potential tax liability. This causes significant tax uncertainty in the minds of Angel and VC funds. Start-ups have also appeared to have chosen not to challenge such notices to avoid higher litigation costs.”
Additionally, the coalition also pointed out to the Equalisation levy.
“The Equalisation Levy combined with GST could potentially go as high as upto 38%. This will have a serious impact on a start-ups which spend about 40% of their budgetary expenses on online advertising. The impact will become worse if other services such as cloud computing are brought within the Equalisation levy net. This will have disastrous effects on Indian start-ups and make them internationally uncompetitive vis-à- vis start-ups established in jurisdictions such as Singapore, USA etc and discourage them from incorporating in India.”
They said that there is an immediate need to rationalise provisions and processes of their application in order to ease out the stress for startups.