Don’t scare startups to splutter down

The Income-Tax (I-T) Department has sent notices to several startups to share details of ultimate investors in angel funds that have bankrolled them. Perceived suspicion over round-tripping of Indian investments could end up preventing the free flow of capital for startups and stifle entrepreneurship. Fund managers of alternative investment funds (AIFs) such as private equity (PE) and venture capital funds (VCFs) have the expertise to comply with KYC norms. But for angel funds, the responsibility of investor due diligence rests on startups. Asking startups to determine the ultimate source of funds will push up their cost of raising capital. The I-T department should, instead, accept a self-declaration made by those raising capital.

In 2019, GoI had eased the rules on angel tax, meant to curb money laundering, after many genuine startups received tax notices. Companies categorised as startups by the Department for Promotion of Industry and Internal Trade (DPIIT) were exempt from the tax – levied on the excess share capital raised by unlisted firms over and above the fair market value of its shares. GoI relied on e-verification to establish the identity of the investor and his source of funds.

Following up audit trails makes it easier to track someone who invests in unlisted companies to convert black money into white. Information received from other jurisdictions under the automatic exchange of information also helps establish audit trails in a globalised economy. Listing the actual beneficial owner of any trust or company (read: having a unique identifier), like in Britain, will help trace the ultimate beneficiary even if he or she stays beyond a web of companies and trusts. Global cooperation on this front should be hastened.