Startup tax in Budget 2012-13 raises concern for SMEs

BANGALORE, INDIA:

“I believe this clause is extremely ill advised and has probably been triggered by the 2G scam. Unfortunately, it is the equivalent of dropping an atom bomb on a city because one criminal needs to be killed. This clause will completely kill all angel investment in the country and, with that, spell the death knell of first generation entrepreneurship that had begun to mushroom over the last few years,” says Indian Angel Network co-founder Saurabh Srivastava.

“Various measures enunciated for SMEs will come to naught because of this one clause. This is because angel investment precedes venture capital investment. For VC's to fund 10 companies we need 1000 entrepreneurs to be funded by angels. It is common knowledge that when you fund an entrepreneur who just has an idea and not much else, the definition of fair market value cannot possibly be determined by any valuer and certainly not by a tax authority but only resides in the minds of the entrepreneur and the investor.

Also read: Budget evokes mixed response among India Inc

A tax officer could  legitimately see the value as close to zero,  whereas any angel investor who chooses to invest will do so because he / she sees great value and would buy shares at a huge premium because they would want the entrepreneur to hold a majority of the company.” adds Srivastava of Indian Angel Network that has invested in over 30 start ups in the last 6 years.

“For example an angel investor may invest Rs 1 crore in the Company that has no revenues and no profits and the tax official, unless otherwise "persuaded," would tax the company at 30% for no reason at all and convert an investment into income”, he adds.

“Rather than giving the angel investor a tax break for making such risky investments for "common good" ( creation of wealth and employment), as is done by most countries in the world, we are in effect taxing them and therefore, encouraging them to put their monies in unproductive assets like farm houses and real estate. it is hard to think of a more retrograde measure and one can only hope the framers of this clause did not fully appreciate the unintended damage it would do. It deserves to be withdrawn immediately”, appeals Srivastava.

http://indiabudget.nic.in/ub2012-13/fb/bill31.pdf

{#PageBreak#}21 . In section 56 of the Income-tax Act, in sub-section (2),–

(A) in clause (vii), in the Explanation, for clause (e), the following clause shall be substituted and shall be deemed to have been substituted with effect from the 1st day of October, 2009, namely:–

‘(e) “relative” means,–

(i) in case of an individual–

(A) spouse of the individual;

(B) brother or sister of the individual;

(C) brother or sister of the spouse of the individual;

(D) brother or sister of either of the parents of the individual;

(E) any lineal ascendant or descendant of the individual;

(F) any lineal ascendant or descendant of the spouse of the individual;

(G) spouse of the person referred to in items (B) to (F); and                          

(ii) in case of a Hindu undivided family, any member thereof;’;

(B) after clause (viia), the following shall be inserted with effect from the 1st day of April, 2013,namely:–

‘(viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares: Provided that this clause shall not apply where the consideration for issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund.

Explanation

.–For the purposes of this clause,–

(a) the fair market value of the shares shall be the value–

(i) as may be determined in accordance with such method as may be prescribed; or

(ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature,

whichever is higher;

(b) “venture capital company”, “venture capital fund” and “venture capital undertaking” shall have the meanings respectively assigned to them in clause (

a), clause (b) and clause (c) of explanation.

Source: www.dare.co.in