BW Communities

Spare Start-Ups, FM!

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Dear Finance Minister, I started a business almost two years ago. And on several days since, I've wanted to crawl under my bed and hide. On many others, I've wanted to throw in the towel. Entrepreneurial endeavor has its moments, but often it's one darn frustration after another. And now your proposed Union Budget is giving me a few more gray hair. My business is at a point where I am hoping to raise money from investors. But my venture capitalist friends tell me that the business is too small to be of interest to them. And banks won't touch me - or any business younger than three years - with a barge pole. So my hope has been to ask friends and family to be an angel and invest some money in the business. Your proposed amendment to Section 56(2) will make things difficult for my fledgling business. The amendment asks start-ups to calculate their Fair Market Value. And any investment made above Fair Market Value shall be taxed as income. Now Fair Market Value is hard enough to calculate for large, listed companies: witness the manic gyrations of the stock market that make companies like Infosys or Reliance lose or gain a few percentage points in "Fair Market Value" in a day. Equity value is a bit like beauty: it lies in the eye of the beholder. Start-ups are exponentially worse off. They are often little more than an idea and sometimes not even that. To put a Fair Market Value on them is asking for the moon. To be blunt, does my business even have a Market Value – fair or otherwise? It is so small and unstable; would anyone buy it off of me? So why do I continue to slave on in this company? And why would any sane investor want to invest in this unsellable business? Because of hope and promise. To paraphrase those famous words, I too have a dream. And my angel investor is willing to bet on my pig-headedness to actually try and work towards that dream. So my angel investor and I agree on a Fairy Market Value… fairy, angel, get it? But let me confess that I am secretly delighted at the proposal… though don't tell my fellow entrepreneurs. They are quite upset about this amendment and I don't want to be at the receiving end. The reason for my glee is this: I know of one example, and am reliably informed that there are several others, where the income tax department has threatened to tax the equity invested in a startup as income. The battle drags on in the courts. And it's my nightmare that I could be in their shoes soon. The proposed amendment if enacted, will hopefully, fend off the unwanted attention of the income tax department and give legitimacy to all venture capital investments. And you've been kind enough to remove the sectoral caps from venture capital investments. So all is not gloom and doom. Yet it isn't hunky-dory either. My only hope of an investment in my startup lies with friends and family. And your amendment will dash that hope. Any angel investment or investment from friends and family will value my business way above the face value of the shares. And the income tax department will promptly tax that money. So may I suggest an amendment to your amendment? a. Please postpone the amendment for a year. b. During this time, ask all who wish to act as angel investors to register with Sebi. Perhaps the registration requirements for angels can be less onerous than for venture capital funds. The aim being to have transparency on the source of the funds being invested. c. And put an exemption limit to the angel investment. For example, investments below Rs 10 crore may be exempt from such registration requirement. Your current proposal will put an end to all angel investments and send several start-ups to an early grave. And that's not even counting the serious negative impact on entrepreneurial activity in the country. Don't get me wrong. I'm glad that you, unlike Greece, are not asking for my stool-sample* to start a business. And I do sincerely appreciate your efforts to curb money laundering. But please consider an alternative to throwing the baby out with the bath water. Sincerely, Amit Wilson *<a href="http://goo.gl/Er7ca">A Tale of Greek Enterprise and Olive Oil, Smothered in Red Tape</a> (Amit Wilson runs StoreMore.in, a personal storage service, and Reliable Records, a records management service for corporations)