In absence of tax rebates for angel investments, capital gains tax parity with listed stock, is a key policy change that will help boost angel investments in new ventures in India
The recent Budget has mentioned that angel investor pools
will now be able to organize themselves as a Category I Alternate Investment
Fund.
As I had mentioned in an earlier post Angels can organize themselves in Category I AIF Fund, this measure
looks set to be a non-starter because of limited applicability of the framework
to individual angel investments
What are other countries doing?
Various countries primarily offer tax rebates or credits for
angel investors who invest in start-ups and new ventures under varied formats
What could we do?
In India, we face a dichotomy as the government is currently
tackling larger issues of tax compliance and non-reporting of wealth and
income, so a rebate or a credit looks counter intuitive
A start could be made through capital gains tax parity
1.
Making capital gains tax on angel investments at
par with capital gains tax on investments in listed companies or mutual funds
2.
Ability to set off profits from one investment
with losses from another
Key is to differentiate between tax evasion and new venture funding
The government’s concern that angel investments should not
become another format for unaccounted money flowing into questionable companies
is valid.
However, the key here will be to differentiate between
investments made in small enterprises for the purpose of tax evasion and smart
money invested in new ventures by angels who invest to grow fledgling ideas
into companies
Defining new ventures and angel investments
The policy will require a robust definition for both new
ventures and angel investments.
Some thoughts on this are:
Define new ventures as:
A company registered in the past 5 years
A company not promoted by another company/ group
of companies with more than INR 25 crore annual revenue
Set limits for tax parity on angel investments as:
Maximum limit of INR 1 crore of investment per
annum per individual
Investment to be done only as an individual and
not as a company
Some more debate is required on how we could make both these
definition more robust, do respond with your comments on this
Will more angels start investing only because of the capital gains parity?
Angels will not invest in riskier start-ups purely because
of the parity, but this will ensure they are not deterred by the higher tax
they will otherwise pay on their profitable investments
A stock market investor in India today expects a minimum of
15% on his investments, as opposed to a developed market where they might be
happier with a lower rate.
A new venture has to be able
to provide at least 30% returns to to attract investments. This number actually gets
compounded when one factors in the high rate of failures of new ventures and
the lack of exit options for the investor.
Moreover, angels take a portfolio approach in their
investments, expecting only 20-30% of their investments to make up for the
losses of the rest of the companies.
Both the capital gains parity and a set off feature will better
the investors’ chances of improving returns on new venture investment.
This will also ensure the angel investor is not getting discouraged by
adverse taxation while deciding on an already risky investment option.
In conclusion
If the government is unable to look at these two measures
currently, in my view it is best that angel investments be left to evolve on
its own without too many policy frameworks.
Without a detailed thinking through, wrong policy making
might actually become a hindrance to a fledgling source of clean and smart
money flowing to new ventures.
