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Indian Government To Tax Angel Funding
kousik writes "The Indian Government proposes to tax Angel Investment as income and is asking start-ups to pay a 30% tax on the funding. From the article: 'Ravi Kiran, co-founder of middle-India advisory Friends of Ambition (FoA) and member of Indian Angel Network told Firstpost: “There seems to certainly have been an error in understanding on the part of the Budget makers. If this is pushed through, it will spell serious trouble for the angel investor and entrepreneurship space. I feel this is an error and should be corrected quickly before it leads to confusion.”'"
Bonds are debt, stock is ownership.
Neither the summary nor TFA said what this term meant. For those who don't know, essentially an angel investor is someone who invests their own money in a start-up or very young company in return for weak control of a part of the company.
Sure they are. That's not the point. Everyone knows india is corrupt top to bottom, and there are people using every means possible to dodge tax, legally or otherwise.
The issue is whether or not the law would, if applied, seriously stifle investment. Which, assuming the text is correct, it would. The intent of laws and there impact don't always align, this seems to be one of those cases, where either the people who wrote the law don't really grasp the spillover effects, or the people who are writing about it don't understand what the law says.
Now the thing is, lots of countries have 'double taxation' where the profits a corporation makes are taxes, *and* the dividends to shareholders are taxed. In this case they're saying investment in the company would be taxed as well, which could be triple taxation, or it could just be a stupid way of trying to collect existing owed taxes.
And yes, of course, if you set up your own business and invest in it you could be trying to dodge tax (Sri's game testing and cat sitting services, who's sole customer is Sri, who is, incidentally, the sole investor). I don't dispute the possibility of that being widespread and damaging to the economy and tax base.
Equity = Assets - Liabilities
The investors trades cash for shares with the company - So your right there. On the other hand, for the company the new cash, an asset, is coming into the company, This will increase both the asset account and the equity account.
The accounting transactions would be
Credit the cash account in Assets
Debit the Paid In Capital account in Equity.
If the company was issuing new debt - and thus no new equity, the accounting transactions would be:
Credit the cash account in Assets
Debit the Long Term Debt Account in Liabilities.
A company that issues a bond is obligated to pay interest on the bond and to return the principal when the bonds mature. A company that issues stock has no obligation to pay dividends or to buy back the shares. If a company goes bankrupt bondholders are at the front of the line to get repaid. Common stock holders are at the back of the line and only get what is left after everybody else has been repaid.
Capital gains tax is applicale to the selling of shares.
Let me explain how that's different: Capital gains tax is (PROCEEDS OF SALE) MINUS (COST BASIS)
Currently you don't pay any taxes on a stock split and don't necessarily pay taxes on capital distributions either (your cost basis is decreased). What happens with a stock split is the number of outstanding shares are doubled in a 2:1 split, so you wind up with twice as many shares, each worth half their original share price.
In a normal 2:1 stock split, you don't get any cash, only additional shares of stock that are distributed to you, but all shares (including the ones you already hold) are now only worth half as much a share in the company, so your total share in the company remains the same after the split.
VAT.
Let me explain how VAT is different. VAT is a tax you pay on the purchase. Currently you don't pay an additional tax on the actual you money you borrow on the credit card. Currently debt you take out is not treated as income.
Also subject to capital gains tax if it's not your main home. Regardless of stamp duty.
Currently you only pay capital gains tax if you sold the home for more than your Adjusted cost basis, (Purchase Price) Plus (Property Improvement Costs) Minus (Depreciation)
The budget proposal is much more complex and interesting as it seems.
First it apparently it applies only on money invested by residents, so it would not slow down any foreign investments (although there might be other mecanism impacting this).
Second the 30% tax is not on the investment, but on any money paid for share over the fair market value.
So in short, if I create a company investing 10 K, make some business and show that realistically the company is worth 20 K, and then go to Mr MoneyBag and offers him to invest 20K for 50% of the share, I and hil pay nothing.
If I ask 15K and invest 10K in the capital keep 5K for me and give 50% of the company to Mr MoneyBag (effectivelly selling 5K of shares), I pay nothing.
Now If I ask 20K but make it prudently in two time, 15K "tax free" and then 5K tax "heavy" I would pay 1.5 K in taxes, to be compared to
using the 5K to pay me a salary that would be impacted by taxes and various social costs.
So the real issue will be on "how to evaluate the fair market share of a closely held company" and it's impact on "petty corruption", but the law is rather reasonable, and it encourage entrepreneurs to leave money in their company until it really "runs" rather than cash out at the earliest opportunity.