The recent Supreme Court judgement that has gone against Tiger Global may significantly dampen the confidence of global investors operating in India. This ruling highlights a critical concern: agreements made in the past are now open to reinterpretation, creating uncertainty in the regulatory environment.
Implications for Global and Angel Investors
While recovering taxes from a single investor might offer short-term fiscal benefits, the long-term impact could be detrimental to the broader investor community. International investors may begin to question the stability and trustworthiness of India's legal framework, particularly regarding laws established by previous governments. To counteract this, the upcoming budget must prioritize clarity and simplification of regulations, especially those affecting global capital inflows.
SEBI's New Angel Investor Norms: A Barrier to Entry?
Ideally, the government should unleash private capital to fuel startup growth. However, recent SEBI regulations for angel investing have raised the accreditation bar substantially. Previously, individuals, HUFs, Family Trusts, or Sole proprietorships with a net worth exceeding Rs 2 crore (excluding primary residence) could qualify as angel investors.
Under the new rules, the net worth requirement has surged to Rs 7.5 crore or more, with at least Rs 3.75 crore held in financial assets (again, excluding primary residence). When considering purchasing power parity (PPP), this threshold appears excessively high, effectively excluding a significant number of potential investors from participating in early-stage funding.
The government should establish a uniform policy for accredited investors but with more accessible norms. Interestingly, before tightening angel investor regulations, authorities might consider scrutinizing Futures and Options (F&O) trading, which involves higher risk and speculation. Angel investing, after all, plays a crucial role in capital formation for innovative ventures.
Addressing Disparities in AIF Unit Sales
Another pressing issue involves the sale of Alternative Investment Fund (AIF) units. When an investor participates in an AIF, they receive units that are often illiquid and challenging to transfer. Even if a willing buyer emerges, AIF units must be valued at Fair Market Value (FMV), creating a hurdle.
In contrast, the sale of underlying securities, such as company shares, does not require FMV valuation as long as the transaction price exceeds book value. This disparity between selling AIF units and selling shares of companies held by these funds needs elimination. Aligning these processes would enhance liquidity, making it easier for investors to exit AIF investments and encouraging greater participation in alternative investment vehicles.
This adjustment is fully compatible with existing tax laws; it simply requires consideration by the finance ministry to be formally recognized and implemented.
Government as a Venture Debt Provider
The government's recent approval of Rs 5,000 crore in equity support for SIDBI aims to boost credit flow to the MSME sector. Currently, government investments in startups carry a 6% interest rate with secured assets. To further assist startups in raising capital and to derive greater benefits, the government could consider increasing the rate to 8% while offering collateral-free loans, provided the startup is certified and rigorously evaluated.
This approach could help reduce India's high venture debt rates, which typically range from 13% to 18%. For instance, a tech-driven company with a developed prototype might receive an 8% yield with a warrant structure. Such warrants could yield substantial returns even if only a small percentage, say less than 10%, of these companies achieve significant success. Thus, the government could effectively become a venture debt provider or a collateral-free loan facilitator.
Strategic Investment in Deep Tech
The government has established a Rs 1 lakh crore fund for deep tech, though the definition of "deep tech" remains somewhat ambiguous. This allocation is relatively substantial for the sector. A more balanced strategy might involve dedicating a portion of this fund specifically to deep tech initiatives while allocating the remainder to other promising avenues, ensuring diversified and effective use of resources.
Taxation Reforms: Household-Level Approach and Widening the Net
We must commend the Finance Minister and the government for significant strides, including tax rationalization up to INR 12 lakh for common citizens and GST reforms. However, two key recommendations could further enhance the tax system:
Introduce Taxation at Household Level
India currently employs an individual-focused income tax system, assessing and taxing each person's annual income separately. Shifting to household-level taxation would allow assessees to rationalize or reduce their tax burden by filing returns either as a household or as an individual.
If a household's cumulative income falls below a specific threshold, the tax rate could be lower. For example, a married couple with a combined income of Rs 30 lakh might face a 20% tax rate instead of the current 30%. This approach acknowledges that a family's ability to pay taxes depends on shared expenses, not just individual earnings, making it a concept worth exploring and implementing.
Widen India's Tax Net
Currently, less than 4% of India's population pays income tax, placing a disproportionate burden on the salaried and middle classes. In comparison, approximately 60% of households in the United States pay federal income tax, and about 10-14% of China's working population contributes. To alleviate this pressure, the government and stakeholders must find ways to bring more working individuals into the tax bracket.
One potential strategy is to incentivize high taxpayers through public recognition and rewards, encouraging broader compliance and equity in the tax system.
