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.”'"

Comments

I'm sure the devil...

[davidwr]

... is in the details.

Re:I'm sure the devil...

[FatdogHaiku]

... is in the details.

Empirical data indicate he's still at the capital... every capital... like usual...

Selling shares is debt, not income

[EmagGeek]

It's clear the legislators have zero clue what investment means.

When a company receives startup funding, it is in exchange for ownership shares. That makes it borrowing, not income. Shareholder Equity offsets that funding on the balance sheet.

Re:Selling shares is debt, not income

[LostCluster]

Bonds are debt, stock is ownership.

Re:Selling shares is debt, not income

[khallow]

Bonds are fixed sized claims on future income. Stock is a claim on ownership. They aren't that different. Both engender an obligation in the corporation in exchange for money.

Re:Selling shares is debt, not income

[whoever57]

It's clear the legislators have zero clue what investment means.

True enough.

When a company receives startup funding, it is in exchange for ownership shares. That makes it borrowing, not income. Shareholder Equity offsets that funding on the balance sheet.

Now you are showing your ignorance. It's not a loan. It's not borrowing.

But the summary doesn't tell the whole story (I know, what a shock!):

There is a Budget proposal to tax at 30 percent any investment received by closely held companies where the aggregate investment exceeds the fair market value of shares.

Most likely, this is aimed at money laundering. The uncertainty caused by this and the possible corruption amonst those who enforce this are likely to stifle angel investment.

Re:Selling shares is debt, not income

[Anonymous Coward]

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.

Re:Selling shares is debt, not income

[Ihmhi]

India's government is just as corrupt as most other governments in the world. They just don't give as much of a shit about hiding it.

Equity

[alexander_686]

Selling shares is selling equity - which is kind of the opposite of debit. Well, assets are the opposite of debit, but I am sure that is were part of the cash will go..

Re:Equity

[alexander_686]

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.

Wow

[JWW]

And her I thought regulatory uncertainty and IP law we stifling innovation.

The Indians are taking innovation killing to a whole new level.

Re:Wow

[Anonymous Coward]

Don't be live the summary. The Indians are worried about tax dodges exploiting a loophole by pretending it is investment when it is just hiding cash in a shell organization.

Re:Wow

[Sir_Sri]

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.

Re:Wow

[khallow]

That's not double taxation

Sure it is.

Dividends are paid from corporate income which is already taxed. Capital gains usually are a result of reinvestment in the corporation which is not taxed as corporate income.

Right now dividends are being used as a tax dodge because the max tax rate on capital gains in the US is 15% and no FICA.

Dividends are considered income in the US not capital gains. And no FICA makes sense since the income is coming from an investment. If you're investing, then you're not the problem Social Security was meant for.

Tax too high and it stops.

[LostCluster]

If they charge 130 to get a 100 investment... the business must go up 30% in order for the investor to make a profit. Better off taking that money to another market where you can get 130 for your 130. This idea stinks.

Re:Tax too high and it stops.

[bill_mcgonigle]

This idea stinks.

Not if you're the incumbent the startup is about to compete against. Cui bono.

Coming to an anti-capitalist country near you

[mysidia]

Stock split taxation.... What, you owe stock, and, the number of shares you have is doubled? Now you will have to pay a 30% share price tax on your increase in shares.

Credit card taxation.... spend $$$ on a credit card, sounds like free money, you will have to pay 30% of your credit card spendings to the government.

Auto purchase taxation... what, free money from the bank? OK, but you will owe 30% of your auto purchase in taxes.

Mortgage taxation.... what, more free money? OK, but you will have to pay 30% of the money you get from your mortgage back to the government.

Sold your home for less than you bought it for? Oh, it still looks like you got lots of money from selling it. We will have to charge a 30% tax on this windfall income.

Re:Coming to an anti-capitalist country near you

[mysidia]

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)

Re:Coming to an anti-capitalist country near you

[mysidia]

I notice that "adjusted cost basis" does not appear to account for inflation....

Indeed it does not. You also still pay taxes on interest earned in a savings account, even if inflation during the year was higher than the interest earned -- so that in fact, your purchasing power was eroded during the year by more real dollars than the actual increase.

It's a fundamental flaw and unfairness in the way that income taxes are devised -- they tax numerical change in number of dollars, instead of taxing numerical change in the usefulness of the money you have for purchasing products.

In a fair system, during times of deflation, you would have a 'synthetic income' based on the increase of value of your money, and during times of inflation, you would have a 'synthetic loss' based on the change of value to your money; and the rate of taxation should also be adjusted properly.

Re:Coming to an anti-capitalist country near you

[unixisc]

For the US, you forgot the one that takes the cake - AMT on imputed income. Namely, if you had stock options of $x, which you exercised when its price was $(x+y), you'd get taxed on the $y, even though you've not sold a single share and have actually made squat. Let's say you sold it during tax time to pay out that tax, and lets say you sold it when the price was back @ $x, then you essentially have to pay taxes on $y - money you never made, but only theoretically had.

Don't ask me for a car analogy to explain the above!

Re:Coming to an anti-capitalist country near you

[neonKow]

Fair and unfair compared to what? There is a fallacy there in thinking that taxes are supposed to be a percentage of your income simply because that's how we've always done it. The truth is that taxation is no more than a way for the government to have an income to run the government and have public project an a military or whatnot.

It's not unfair because they're not trying to penalize you for having additional purchasing power. And it's not unfair if they tax all income equally (they don't, but that's a separate issue from whether you should have a 'synthetic income' in times of deflation).

Thank you, India.

[pubwvj]

The rest of the business world thanks the Indian government for destroying India's competitive edge. Now it will be all the easier to compete against India. Rah-rah, India!

Why is it that government's just don't get it. They need business to provide jobs so they can have something to tax. Dummies.

Understanding may not be the problem.

[__aaltlg1547]

Major corporations would be FOR this sort of legislation. It prevents competitors from getting into your market.

Re:Understanding may not be the problem.

[ErikZ]

Any established business, not just "Corporations".

Re:Understanding may not be the problem.

[__aaltlg1547]

Yes, but small established businesses may need investor funding to expand their operations and compete on a larger scale. They're getting screwed. Only the big boys who don't need outside funding benefit.

What an angel investor is.

[JoshuaZ]

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.

Re:Doomsday scenario or .....

[alexander_686]

For high risk, high return start ups, like tech, maybe not.

But it will dent the low risk, low return start ups. Got a nice little business that you want to start up, like a corner shop. Expecting 5 to 15% returns per year? All of a sudden you have pushed the break even point for the investor 5 years out into the future. piss poor returns here.

Re:Slashdot rewards STUPID moderators

[mooingyak]

So your complaint is that he didn't hit +5 inside of the 11 minutes between when you posted and when he posted?

Re:Doomsday scenario or .....

[dbc]

I see you are posting under the handle "slowLearner". Why, yes, I'd say you are.

It's no different from taxes on bankrupt loans

[Barbara, not Barbie]

It's no different from going bankrupt, then finding out that you have to declare the portion of any loans you never paid back as "income". Plenty of people got bitten by that when they were foreclosed on, and plenty of students will get bitten by that in the future, now that student loans are a bubble.

Reading the article helps

[Coeurderoy]

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.

Cr/DR mix up

[ryzvonusef]

Remember, Assets and Expenses are DEBITED when increased, and vice versa.
Similarly, Income, Equity and Liability are CREDITED, when increased, and vice versa.

The entry you were looking for was:

DEBIT the cash account in Assets
CREDIT the Paid In Capital account in Equity.

Also

DEBIT the cash account in Assets
CREDIT the Long Term Debt Account in Liabilities.

Minor error, but with major impact. Thought it ought to be rectified, to prevent confusion.

Re:do they tax frosty piss?

[ashtophoenix]

Quoted from TFA:

In Budget lingo, this pertains to cases “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”.

It clearly says resident. How is it trying to prevent foreigners??