‘Today, entrepreneurs representing a wide cross-section of society refuse lucrative jobs to start their own businesses.’

 

Former American president Ronald Reagan famously said, “Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”

He could have been talking about the Indian government. Regimes change, so does the phraseology of rhetoric of ruling deities, but economic policy doesn’t. The angel tax imbroglio highlights this truth.

While our politicians say nice things about entrepreneurs and claim that they are providing a robust ecosystem to boost innovation and nurture start-ups, there is an abyss between their words and actions. Typically, the government has unleashed taxmen against the start-ups, so much so that even a Union Cabinet Minister has had to speak out against this.

Commerce & Industry Minister Suresh Prabhu wrote to Finance Minister Arun Jaitley to resolve the issue.

“This is one of the key issues affecting investment into early stage start-ups, commonly referred to as angel tax. This issue has been a major impediment in flow of investment into start-ups,” Prabhu wrote.

What does this say about governance in general and the tax regime in particular? The institutional mindset, and reaction to anything good, is essentially coercive, intimidating, often extortionist.

The romance is, as Jaitley said in his 2018 Budget speech: “Venture Capital Funds and the angel investors need an innovative and special developmental and regulatory regime for their growth. We have taken a number of policy measures including launching ‘Start-Up India’ programme, building very robust alternative investment regime in the country and rolling out a taxation regime designed for the special nature of the VCFs and the angel investors. We will take additional measures to strengthen the environment for their growth and successful operation of alternative investment funds in India.”

The reality is Prabhu’s protest against taxmen whose actions have proved to be “a major impediment in flow of investment into start-ups”.

The Finance Ministry’s reaction has been pro-forma. The Central Board of Direct Taxes (CBDT) says that “no coercive action or measures to recover the demands of completed assessment under income tax would be taken”. An expert committee has been constituted to look into the taxation issues of start-ups and angel investors. Evidently, it will make recommendations on the subject—the most valuable of which will be ignored by the powers that be.

Start-ups have been crying about taxation of angel funds under Section 56(2)(x) the Income Tax Act, which provides for taxation of funds received by an entity.

Ostensibly intended to check tax evasion and curb transactions involving black money, the section has become the bane of start-ups. One doesn’t know if the contentious provisions have done any good to the exchequer—in general, the government’s record of bringing back ill-gotten wealth stashed in overseas banks and curbing black money has been dismal—but it is quite clear that they have been tormenting entrepreneurs. Today, entrepreneurs represent a wide cross-section of society, many of them being educated and technically qualified youngsters. Often they refuse lucrative jobs to start their own businesses. They help increase GDP, generate employment, and contribute to the tax kitty. Measures like angel tax prove to be big dampeners to their businesses. But Arun Jaitley and FinMin officials are not bothered. In his recent interview to a news agency, Prime Minister Narendra Modi said, “A start-up ecosystem has been promoted which is being driven by the middle class. There are a number of such examples.”

The Angel Tax acts as a dampener on the PM’s declared objective.

The government led by Narendra Modi began its flagship initiative, Startup India, in 2016 with the object of building “a strong ecosystem for nurturing innovation and startups in the country that will drive sustainable economic growth and generate large scale employment opportunities”.

It wanted “to empower startups to grow through innovation and design”. The folks it has ended up most empowering, though, are taxmen.

This is not to say that nobody in the government knows what to do. Economic Survey 2018, for instance, waxed eloquent about such actions as “easing the costs of doing business further”, “creating a clear, transparent, and stable tax and regulatory environment”. It went on advocating “a conducive environment for small and medium industries to prosper and invest will help revive private investment. The focus of investment-incentivizing policies has to be on the big and small alike. The ‘animal spirits’ need to be conjured back.”

But measures like angel tax do just the opposite: they depress animal spirits. Hopefully, the PM will act on the matter before the next set of tax proposals gets finalised.

 

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