On Friday I posted about some measures that entrepreneurs in the mobile space would like to see to stimulate more investment and development in the sector. None of the measures that could help the mobile industry were mentioned in a budget that had Indian ministers falling asleep in their seats. It was very much a case of blessed be the farmers and the bicycle makers. As a fan of fresh food and bicycles that's all well and good. There was no mention of any support for the great technology industries of India at all.
Instead, the government has raised a gun to the head of the entire startup ecosystem. In what may be a well meaning piece of legislation to curb tax evasion, they have fundamentally failed to understand how working capital actually works in technology start ups. Angel investment relies on the investor believing the entrepreneur and team have a strong idea, and the ability to deliver the product when given the funding to make it happen. The investment made allows the team to work with complete focus on that product and stay alive in the process. Startup founders are not living the good life, they're working really hard on something that has at best, a slim chance of making revenue.
Clause 21, Section 56, item B, of the direct taxes bill for the 2012 budget states:
(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;
Which in real English, means that if an Angel Investor invests Rs10,00,000 in a company at a nominal value agreed at it's formation to allow a product to be developed. The tax man will essentially now have the right to tax this investment at 30% as income to the company. In tech companies, it is common to have more than one funding round for products that simply don't have revenue yet. Taxing early stage investment in is tantamount to commercial suicide. India needs it's massive technology sector to build it's own services as well as servicing corporate IT if it is going to remain successful.
Killing the Startup ecosystem, with all the good that is coming up through the entrepreneurial culture it is nurturing here, will strategically cripple a nation. I had been warned about Indian politics, but with this legislation, Finance Minister Pranab Mukherjee has totally exceeded my expectations.
Naturally, high profile Angel Investors are up in arms, you can read their thoughts in these articles which prompted my post…