Govt Plans Tax Reduction For Startups, VCs; Industry Excited With The Possibilities

The existing tax structure in India for startups and venture capitalists is complex, and hard. Instead of staying in India, several startups have already relocated to countries like Singapore and Hong Kong to benefit from their easy and helpful corporate rules.

But things may soon change India.

As per reports emerging, it has been revealed that Government plans to reduce tax burden for startups and VCs in India; a move which has trigger a wave of development and progress. In fact, as per some analysts, this decision by Indian Govt. can recreate Silicon Valley in India.

Reduced Tax = More Progress

Right now, angel investors in India are required to pay 33% tax for short-term capital gains from their investments in startups; while its 20% for long term gains with holding period of 3 years.

This is certainly one of the highest tax structures in the world; and even if we compare this with Indian stock market, it is actually unfair. Investors of stock market are not required to pay any long term capital gains tax, and for short term investments, the tax is capped at 15% with holding period for one year.

Understanding this requirement for a reduced tax structure, Department of Electronics and IT (DeITY) has already sent a proposal to Finance Ministry for reducing this extreme tax burden, and for promoting startups in India.

An official said, “70-80% of startups in the country are tech related and we need to find a way to encourage private capital and long-term investment in Indian tech startups,”, adding, “We completely understand that we need to encourage investment and taxes need to go down if capital funding has to flow into the startup ecosystem if we want to recreate a Silicon Valley here,”

Besides, proposal to exempt taxes from ESOPs have also been sent, which will make it easier for founders to recruit and retain talented employees.

The proposal also includes an easy exit route for startups, which doesn’t hamper the progress and plans of the entrepreneur or VC.

As per ET, the proposal has “guidelines on valuations of startups and easy exits and no stigma for failure, like blacklisting etc. for financial institutions”

Industry Is Ecstatic and Hopeful

Startups, VCs and promoters of Entrepreneurship have expressed their joy over this latest development.

Saurabh Srivastava, cofounder of the Indian Angel Network and Nasscom said, “It is a very, very positive step, and which could turn out to be transformational for the country’s startup ecosystem. We’re not asking for extra benefits, all we want is to be aligned with the public markets.”

Highlighting the importance of easy and feasible ESOPs for better recruitment and employee motivation, Srikanth Meenakshi, an entrepreneur said, “Any relaxation of constraints will definitely percolate handing out of Esops through the chain of the organisation, which currently isn’t the case in India, as it is in… the US,”

Government Wants Startups To Flourish

In the budget speech, FM Arun Jaitley had already proposed establishing a unique ‘Fund of Funds’ for easy capital flow into new startups; and have even allocated a budget of Rs 2000 crore for the same.

In August, a special ‘Aspiration Fund’ was created by the Government to promote Make in India vision, and to provide easy funding for startups.

SEBI has already proposed relaxation for rules for filing IPOs; especially for startups and RBI has even earmarked Rs 2000 crore to fund Indian startups in 2015. Earlier in the year, Rs 20,000 crore Mudra Bank had been announced for boosting startups in India

We hope that the proposals sent regarding lower tax structure is approved by the Govt., and Indian startup eco-system gets a new boost and power to expand exponentially. We will keep you updated as more details come in.

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