Bangalore: The 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 surely is a blow on the growing entrepreneur ecosystem in India.

Simply put, this would mean that any angel investment that a company raises in excess of the fair value of the shares will be taxed and will be considered as income for the entrepreneur. However, this provision shall not apply where the consideration for issue of shares is received by a VC firm.  

This certainly is not a healthy wind blowing in the angel investors and startup fraternity and might be the first step towards killing the startup instinct among the emerging and upcoming entrepreneurs in India. So what should such people do? Should they raise the angel investment as early as possible or should they try to bootstrap more fund from their near and dear ones?

An angel investor not only invests money but hours of time in guiding and mentoring such startup entrepreneurs. Is the government planning to tax that too? There might be enough scope for negotiation with the accessing officer leading to more corruption. This might also open way for such startups to opt for foreign investors leading to a critical situation for the home based angel investors and venture capitalists.

The other avenue to be considered by such startups is to start a Limited Liability Partnership, as the tax is applicable only to companies. Later, when they plan to raise VC funding, they can create a company and transfer the assets. However, for a product company, this transfer of assets might be a bit pocket pinching as they need to pay stamp duty and or capital gains taxes. But for services companies that do not need the entrepreneurs to mess up with assets will be a considerable thought to walk on. On the other hand, angel investors are critical for high-growth companies. These high-growth companies create lots of jobs, attract high quality investment from VCs and PEs, and help the country to compete globally. Also, the angel investors might start thinking of opening an offshore entity to invest in startups, or can opt for convertible debt.

The government might get 30 percent of the investment pie as tax, but will this tax not end up the entrepreneurship instinct and startup adrenaline among the young and aspiring entrepreneurs who plays a crucial role in the development of the economy of the country? Might be time is the only answer to this.