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Indian Government To Tax Angel Funding

Posted by samzenpus on from the nothing-is-free dept.

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.”'"

16 of 157 comments (clear)

  1. Selling shares is debt, not income by EmagGeek · · Score: 5, Insightful

    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.

    1. Re:Selling shares is debt, not income by LostCluster · · Score: 3, Informative

      Bonds are debt, stock is ownership.

    2. Re:Selling shares is debt, not income by whoever57 · · Score: 5, Interesting

      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.

      --
      The real "Libtards" are the Libertarians!
  2. Wow by JWW · · Score: 4, Insightful

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

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

    1. Re:Wow by Anonymous Coward · · Score: 5, Insightful

      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.

    2. Re:Wow by Sir_Sri · · Score: 4, Informative

      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.

    3. Re:Wow by khallow · · Score: 3, Insightful

      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.

  3. Tax too high and it stops. by LostCluster · · Score: 3, Insightful

    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.

  4. Coming to an anti-capitalist country near you by mysidia · · Score: 3, Insightful

    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.

    1. Re:Coming to an anti-capitalist country near you by mysidia · · Score: 4, Informative

      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)

  5. Thank you, India. by pubwvj · · Score: 4, Insightful

    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.

  6. Understanding may not be the problem. by __aaltlg1547 · · Score: 4, Insightful

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

  7. What an angel investor is. by JoshuaZ · · Score: 4, Informative

    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.

  8. Re:Equity by alexander_686 · · Score: 5, Informative

    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.

  9. Re:Slashdot rewards STUPID moderators by mooingyak · · Score: 3, Insightful

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

    --
    William of Ockham had no beard. The most likely explanation is that it was chewed off by squirrels every morning.
  10. Reading the article helps by Coeurderoy · · Score: 3, Informative

    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.