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Businesses The Almighty Buck

Indian Government To Tax Angel Funding 157

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.”'"
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Indian Government To Tax Angel Funding

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  • by davidwr ( 791652 )

    ... is in the details.

    • ... is in the details.

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

  • by EmagGeek ( 574360 ) on Sunday March 18, 2012 @04:44PM (#39398143) Journal

    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.

    • 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..

      • by khallow ( 566160 )

        Selling shares is selling equity - which is kind of the opposite of debit.

        The point is that the corporation is receiving money in exchange for creating a substantial future obligation on the income of the business. (This incidentally means that selling equity is not an "opposite" of debt in any sense of the word. The debit is the shareholder equity as EmagGeek explained.) And it sure isn't income any more than debt is.

        • by stdarg ( 456557 )

          I think there's a good argument for taxing the sale of new shares as capital gains. The company created the new shares at a cost of $0, and sold them for profit. It's no different than if an employee of the company created something for $0 (out of the goodness of their heart) and the company sold it for a profit.

          Imagine applying the same thing to something like a painting. You buy a painting and it doubles in value. Instead of selling the painting, you sell a 100% share in the painting, and then claim that

          • by khallow ( 566160 )

            I think there's a good argument for taxing the sale of new shares as capital gains.

            No capital was gained. It was merely exchanged. And the only businesses where this is the means of profit, are fraudulent pyramid schemes.

            It's no different than if an employee of the company created something for $0 (out of the goodness of their heart) and the company sold it for a profit.

            Sure, it is. Value was created and profited from.

            You buy a painting and it doubles in value. Instead of selling the painting, you sell a 100% share in the painting, and then claim that money is not income since you created a substantial future obligation on the future income of the painting (if it's really truly "sold" in the future you get nothing).

            You own the cash after the transaction. In the case of selling shares, the company does. The money still needs to be either pulled out of the company or used by you for personal purposes in order for you to profit from that infusion of cash. Either is taxable in my part of the developed world (and I bet the same goes for In

      • I believe you are mixing up "debt" with "debit"

        In any case, Equity isn't precisely the "opposite" of Debt (liability), they way you are taking it to mean "opposite" of Asset.

        Cash is an asset. Equity and Debt are both, in a way, a liability for the business, that is, an obligation to repay. In simple terms, Equity simply clarifies, that this portion is owed by the business to the *Owners*, and not to outsiders like "Liabilities" are. Both want a return on this amount, but the return is different.

        I believe th

    • by LostCluster ( 625375 ) * on Sunday March 18, 2012 @04:50PM (#39398175)

      Bonds are debt, stock is ownership.

      • by khallow ( 566160 )
        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: (Score:2, Informative)

          by 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.

          • Keyword there... common stockholders. Most angel investors (at least the smart ones) receive convertible preferred stock and typically recoup their investment if the business fails.
            • Yes, but those preference shareholders are still behind the creditors :P

              The conga line, IIRC, goes something like this:

              Liquidator's charge and commission (the grave digger takes his cut first :P)
              Fixed charge debt holders
              Floating charge debt holders
              No charge bond holders (idiots :P)
              Preference Shareholders
              Common Shareholders

              I believe I might have forgotten an item or two (employee unpaid holiday comes somewhere there too), but still, angel investing is a *very* risky business, and they typically demand *much*

              • by lgw ( 121541 )

                That doesn't work any more, at least for large companies. The government steps in, tells the bondholders to get lost, and gives the remaining assets of the business to the biggest campaign contributors. Ask GM bondholders about the new conga line.

                Also, startups almost never have bonds. The chain there is typically just bank loans -> preferred -> common.

                • Hmm. well my knowledge was based on UK law, so the more you know. Btw, does anybody really know what *actually* happened with the GM bailout? Some concrete details? All I hear is, well, hearsay.

                  Also, true about the start up thing, should have realised that.

                  • by lgw ( 121541 )

                    The bondholders "voluntarily" did not get the payout that law and tradition demanded. The pension fund got preference. The white house was aggressive in forcing bondholders to accept the deal - but just how aggressive is mostly rumors.

          • by khallow ( 566160 )
            A corporation does as per its bylaws have to follow the direction of its stockholders in various things, such as leadership of the corporation and disposition of assets outside of bankruptcy. That is the obligation to stockholders.
    • by whoever57 ( 658626 ) on Sunday March 18, 2012 @05:21PM (#39398371) Journal

      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.

      • Most likely, this is aimed at greedy and ignorant politicians wanting to tap an inflow of money and has nothing to do with targeting money laundering.

        FTFY

    • 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.
      • 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".

        Because that's not actually true. Debt discharged in bankruptcy is not taxable.

        Plenty of people got bitten by that when they were foreclosed on

        Foreclosures are more complex, but if your home was your only significant asset, or you declared bankruptcy to discharge the residual debt, the cancelled debt likely isn't taxable.

        • People were going bankrupt, then the next year getting a tax bill for the principle that was discharged in bankruptcy (because they didn't include the tax liability in the actual bankruptcy).

          Plenty of people got gob-smacked with $50k - $100k tax bills after discharge, which is why a temporary law was put in place [about.com]

          People who have lost their homes through foreclosure or who have restructured their mortgage loans may qualify for tax relief under a new tax law, the Mortgage Forgiveness Debt Relief Act of 2007

    • by Ihmhi ( 1206036 )

      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.

      • The US government instead declares corruption legal.

        • by Ihmhi ( 1206036 )

          The US government declaring corruption illegal would be like the mafia threatening anyone doing a contract killing with getting whacked.

        • Yep, both the USA and India have extremely corrupt governments. It proves that large countries just can't have a successful democratically-elected government; it doesn't work. Either you need to switch to an authoritarian government like China, or you need to break the country up into smaller sovereign countries (no, not with a federal government tying them together) in order to have an effectively-run country. The only country with a population over 100M that doesn't seem horribly corrupt and/or ineffec

      • I disagree with your statement: India is one of, if not the, most corrupt democracy in the world.

        It wasn't always. Under British Rule Civil Servants were paid a good wage and enforced the law. When they gained independence their wages were cut severely and so they developed new sources of income to maintain their status and the result is endemic corruption.

        • Not precisely. The Wages weren't cut, they just become worth less every year. My dad was in the civil service, and he tells me that when he started, even the top ranked non-officers at that time were like kings, enjoying cigars and living a lavish lifestyle, and the officer grades even more so. When my dad retired at the same rank, he barely made his expenses meet, even though, his pay was, amount wise, much more than his seniors ever dreamed off.

          What happened? The currency become worth shit, that's what. H

    • by gl4ss ( 559668 )

      well.. maybe someone in india started selling stock in his company rather than say, milk, and giving access to milk if you had company stock. thus dodging sales tax.

      of course, what sucks about this for indians is that this is higher than usual expected roi for worthwhile investing.. "haha".

  • Wow (Score:4, Insightful)

    by JWW ( 79176 ) on Sunday March 18, 2012 @04:47PM (#39398159)

    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 (Score:5, Insightful)

      by Anonymous Coward on Sunday March 18, 2012 @05:00PM (#39398231)

      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 (Score:4, Informative)

        by Sir_Sri ( 199544 ) on Sunday March 18, 2012 @05:10PM (#39398305)

        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.

        • by ExploHD ( 888637 )

          lots of countries have 'double taxation' where the profits a corporation makes are taxes, *and* the dividends to shareholders are taxed.

          That's not double taxation; the government is taxing the dividends of shareholders as capital-gains because dividends reduce the stockholders equity by the amount of the dividend. It would be no different if you sold your sock at x amount of dollars or x - dividends.

          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. If you work your ass off at a job you're going to being paying your tax bracket plus FICA. Why do you think some CEO's h

          • by Sir_Sri ( 199544 )

            hence the quotes. Just because it isn't always real double tax doesn't mean that isn't the talking point or the way the public generally understands it.

            I'm not in the US, so I'm not familiar with FICA particularly, nor was it in reference to US law. As I explicitly said "lots of countries".

          • Re:Wow (Score:4, Insightful)

            by khallow ( 566160 ) on Sunday March 18, 2012 @09:21PM (#39399717)

            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.

            • by TheSync ( 5291 )

              Dividends are considered income in the US not capital gains.

              More precisely, since 2003 [heritage.org], non-qualified dividends (on stocks held under 60 days) are taxed at your normal income tax rate, but qualified dividends (on stocks held more than 60 days) are taxed at a 5% or 15% rate based on your income level.

              The Obama Administration has recently suggested ending the tax benefit for qualified dividends [aei.org] for high income individuals and them pay ordinary income tax rates on all dividends.

              • by khallow ( 566160 )
                I stand corrected then. And I see the Obama administration has yet to run out of destructive proposals.
      • by gl4ss ( 559668 )

        so they're thinking they'll just TAX when people are hiding cash when they shouldn't have in the first place? yeah that'll work fine!

  • by LostCluster ( 625375 ) * on Sunday March 18, 2012 @04:48PM (#39398169)

    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: (Score:3, Interesting)

      This idea stinks.

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

      • by Anonymous Coward
        India doesn't have a lot of native incumbents.
        • You may not have noticed companies like the $100Bn Tata.
    • by JTsyo ( 1338447 )
      30% of 130 is not 100, just saying.
  • by mysidia ( 191772 ) on Sunday March 18, 2012 @04:53PM (#39398189)

    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.

    • by BenJury ( 977929 )
      HA! There are already here!

      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.

      Capital gains tax is applicale to the selling of 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.

      VAT.

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

      Also VAT, plus fuel duty and VED.

      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.

      Stampy duty.

      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.

      Also subject to capital gains tax if it's not your main home. Regardless of stamp duty.

      • by mysidia ( 191772 ) on Sunday March 18, 2012 @05:56PM (#39398575)

        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)

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

          • by mysidia ( 191772 )

            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 nume

            • 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 se

      • by GryMor ( 88799 )

        Stock Split: No capital gains, you didn't sell/buy anything (value of a share was halved, quantity was doubled)

        Credit card: No VAT, the VAT is on what you used the credit card to pay for (at least, in every country I've been in that had VAT).

        Sold Home: No capital gains (capital loss, in fact) for the given example.

    • 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 e

    • by JTsyo ( 1338447 )
      hmm do I need to show the 1% I get as rewards from my CC as income?
  • good for everyone else.

  • Thank you, India. (Score:4, Insightful)

    by pubwvj ( 1045960 ) on Sunday March 18, 2012 @04:57PM (#39398223)

    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.

  • by __aaltlg1547 ( 2541114 ) on Sunday March 18, 2012 @05:03PM (#39398261)

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

    • by ErikZ ( 55491 ) *

      Any established business, not just "Corporations".

      • 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.

      • "Major corporations" == "established business". You don't become a "major" corporation (as opposed to, say, a one-person "corporation") without becoming "established" first. Companies like Apple and Microsoft don't just spring up overnight with billions in revenue and start filing IP lawsuits against everyone.

  • by JoshuaZ ( 1134087 ) on Sunday March 18, 2012 @05:09PM (#39398295) Homepage
    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.
    • Guy Kawasaki on Angel Investors [inc.com]

      Who exactly are angel investors, and how do I know if they are an appropriate funding source for my company?

      Guy Kawasaki's response:

      Broadly defined, angel investors are high net-worth individuals who invest in entrepreneurial companies, usually at an early stage. Like institutional venture capital firms, many angel investors provide cash to young companies and take equity in return. One difference is that angel investors typically invest smaller amounts of money in individual companies than venture capitalists do, making them a possible resource for companies that have exhausted their "friends and family" financing options but are not ready to approach VCs for capital

  • by Anonymous Coward

    After achieving independence, India tried to be a socialist state with a planned economy. Lots of their leadership was not merely socialist but Marxist. The planned socialist economy failed to improve life for nearly everyone there, but there are still lots of people in power who disapprove of capitalism and especially entrepreneurship. I think you'll find many in government who very much want to believe that the Angel Investors are in that top of that top 1% that deserves to be separated from their mone

    • by Anonymous Coward
      A lot of India's problems since independence has been caused by corrupt politicians. This looks like another opportunity to collect a bribe.
  • everyone will carry on investing like they did before and pay tax on their investments. It may cause some people to be more selective about who/what they invest in but I figure with a growth market like India things will carry on, innovators will still innovate and investors will still find ways to pay little or no tax.
    • 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.

      • If it's low risk, low return, you don't really need angels and they won't be interested in you. Try your bank manager.
      • But it will dent the low risk, low return start ups.

        Low-risk borrowers have lots of other options. Like banks, for example. High-risk, low-return operations, well, they're just not going to get funded regardless. Angel investment is all about high-risk, high-return.

    • by dbc ( 135354 )

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

  • What it really is is an investment killer. And here I was thinking Illinois has an awful business climate.

    • What it really is is an investment killer.

      IF you ever write a sentence with 'is' twice in a row, please think twice about it, for the love of English!

  • by Coeurderoy ( 717228 ) on Monday March 19, 2012 @02:40AM (#39400829)

    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.

    • by msobkow ( 48369 )

      Second the 30% tax is not on the investment, but on any money paid for share over the fair market value.

      The problem is that angel investors are not investing based on the current fair market value of a company, but based on their belief in the projections of the future value of the company and it's hoped-for revenue. The very definition of an angel investor is someone who invests in a company before it has any significant market share, and sometimes even before it has any customers.

      What's the fair mark

      • Again, check the article,
        The tax happens only if the investor "pays" the "current owner".
        So if I build my company with 1€, convince the investor that it now is worth 1 billion €, and that he should invest 1 other billion €, and I put this money in the companies account.
        Then the investor and i both have 50% of the company.
        And there is not tax to pay.

        But if I tell him, It is now worth 1Billions, And I would like it all in cash so that I can take some holliday, but do not worry the other worker

        • by msobkow ( 48369 )

          But your ignoring the key point: Who determines the "fair value"?

          My reading of the article is that either the government or the tax office would be determining "fair value." So what you convince the investor the company is worth is irrelevant -- it's the government that decides when the investment is "excessive."

          • The point is, that the fair value impacts only the payment that is done to the "shareholder" not to the company.
            So even if the government is "unreasonable", wich is not demonstrated (not the the indian government has a very good track record), it does not matter at all as long as the investor really invest.

            In practice in the vast majority of cases the angel investissor does not pay the owners anything, it INVEST in the company by creating new shares and putting the money there.

            In this case there is not tax

  • Awesome! Go India Go! That's the kind of thinking we (the U.S.A.) need to help us stay competitive in the global marketplace.

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