Elusive logic

MINT has a good short piece on the new tax on start-up valuation premium that the Indian Income Tax Department is considering. Apparently, the tax has been around for some time.

This tax has been around for the last four to five years and not just for start-ups. “This is not a new tax, there is no change in the law and it doesn’t affect start-ups that have raised money from foreign funds (Tiger Global, Softbank, Accel among others). This leaves a very small fraction of Indian start-ups that would have to pay this tax and that too (only) for angel investments because a company that raised funds from a venture capital fund that is registered with Sebi would also be exempted from the tax,” says Sanjay Khan who is part of the legal services team for iSpirt (Indian Software Product Industry Round Table). – LINK

On the face of it, it appears to me that the revenue upside is easily dwarfed by the potential negative signal and message it sends.

It is not consistent with the start-up India policy nor does it sit well with the capital gains tax exemption recently granted for investments in unlisted companies. The messaging comes across as inconsistent.

Further, the idea that a young company raising money in a down-round would be served with a tax notice as well strikes me as rubbing salt into the wound. Companies do not do down-round funding, unless their businesses have not been successful. They must be cash strapped. Serving them with a tax notice at that juncture strikes me as somewhat masochistic.

Looks like the universe of companies affected is not that big but the message that it sends is not very reassuring.

Wondering how and why they cook up these ideas in the Indian Income Tax Department

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