The Taxman cannot solve Angel Tax

It has only been a week since I wrote a post on the need to change the investment narrative in India and just 3 days after that, I received a slew of notices from the income tax department asking for ludicrous details on the investments made by Artha India Ventures. Furthermore, a couple of our founders warned us that more notices were on their way since they had gotten them too. This witch hunt is nothing but a death knell for angel investors. Former-IAS Venkatesh Shukla said it best “civil services officers were the “worst” people to decide policies for start-ups.

In one of the notices that we received, we were asked for proof for 20+ points that included literally everything but my medical records (although I should submit them too, just in case). One of the items of the information sought included personal bank account statements of the director of the entity that we had invested through. Since the current directors are all family members, getting this information was not a problem, but can you imagine the embarrassment we would have had to face if we had prominent people as our independent directors? To sum it up, the evidence being sought is nothing but a ruse in forcing us to settle with the officer.

I would love to challenge this harassment in a court of law, but our legal system is already creaking under the weight of crores of cases, adding another one would hardly serve any purpose. The Prime Minister and the Finance Minister need to be cognizant of the difficulties of doing business in India as well as raising seed and angel funding for Indian start-ups. Such fact-finding missions will certainly drive away the much-needed financial support for the start-up industry in India.

Thankfully these notices (as of now) are not being sent to VC/PE funds, so the investors putting in money through funds are safe from this kind of harassment. However, I do continue to believe that we require a robust angel investment ecosystem to start producing 3,000-4,000 seed funded start-ups that will expand out of India by 2030. One of the solutions would be SEBI or a competent authority providing accreditation to certain individuals/entities to be angel investors, a topic I have been discussing on various forums for the past 2-3 years.

This accreditation would put an angel investor on par with VC/PE funds that are allowed to assess the risks of investing in unlisted companies and decide the value they are willing to pay to buy a stake in them. Start-ups that would raise money from accredited investors would only be required to submit the investor’s accreditation certificates (which SEBI can also list on their website) to the income tax officer during the enquiry. If any of the investors on the list do not have accreditation, it would open the start-up and that whole round’s investors to income tax enquiries. The message would be loud and clear i.e. no accreditation is equal to IT investigation. Therefore, this would form a self-policing system wherein start-ups would avoid raising money from non-accredited investors and investors would not like to invest alongside non-accredited investors, thereby pushing every angel investor to get themselves accredited.

The PMO and FMO offices need to step in to stop the mess being created by the income tax department’s officers, from spreading further, or (I shudder to say) we will be an India of 1990 and not 2020.


Do our systems create rebels out of entrepreneurs?

Solve this… Person V does consulting for Person G. The deal is closed, Person G promises to pay Person V. Invoices are issued and Person G changes colour to stall paying out Person V.
Person V has invested months of personal time,  employee time, rent and other overheads to close this deal and it is one of the largest deals in its sector in India. 
Person V has waited to close this deal expand his team (unaware that Person G has other plans). Person V builds a framework to build on the success of this deal. A data mining platform is built which creates new opportunities at minimal costs. The newly hired team starts work and is successful to pay for itself and start repaying the money taken from investors. 
In between a large deal with Person K is done in which Person K pays 25% and then starts to make excuses to avoid payments. Infact the taxes collected by Person K are not paid for months which puts Person V in a position where he might have to cough up taxes that he hadn’t collected! The stalling of payments creates a cash outflow situation for Person V.
Now, the predicament our legal, tax, investment and family places on Person V.

  1. Tax department says pay service tax and income tax on revenues that were invoiced but not received. This will lead further cash outgo. 
  2. Investor says only book what is received, this leads to a book loss as the money that isn’t received so shouldn’t be booked.
  3. Legal says you should litigate for dues which is long tailed. Additionally to prove your case follow point 1.
  4. Family & Investors say your running a loss (on the books) so cut down or shut down. 
  5. How each faction interests is pitted against each other is quite visible.

Person V wants to get paid and is making all out efforts to own up to his responsibility, sending emails, messages, legal notices and even taking on political forces head on to get his dues. 
Meanwhile Person V is confident that the new business that has been built can repay the investors even if the money from Person K and G continues to be outstanding.
In this entire scenario the blame is on Person K and G for not paying on Person V but the entire system works in a manner that it blames Person V for actions of Persons K & G instead of getting Person V his dues. Family, Investors and Government don’t want to take responsibilities for getting Person V paid (so they all get paid) and will instead take the role of blaming the Person V for the actions Persons K & G.
Meanwhile Persons K & G are roaming around posting pictures on social media about how awesome their lives are.
What should Person V do? 

Screw Amendments… Rewrite the Law !

I have wanted to write this post for a very long time but kept putting it off for some good reason best known to the subconscious. However, the attack on e-commerce by the tax-man was the spark that ignited this story. As it is normally the case, some law that was written in goodness-knows-which-generation is going to be used to harass a business enterprise. It doesn’t matter that our PM Modi is racking up air miles in convincing the world outside and within India on a red carpet welcome to capital and services but alas, did someone forget to tell that to the tax man?
So, it all started when I on my daily cramming of articles on Startup Logic read this article on the application of outdated laws to new age business models to a global behemoth like Amazon. The clash has led to a cancellation of licenses for Amazon’s warehouse in Karnataka in addition to the umpteen headaches from the tax authorities and the obvious loss of face. This doesn’t even count the numerous transactions that will be delayed or cancelled due to the diktat.
So while each government has a Finance Ministry which oversees the balancing of the budget, do they have an Economic Impact Unit that offers a perspective on the economic impact of shutting or opening a business unit? Are the tax authorities asked to give an assessment on the positive and negative impacts of their actions and the bigger affect that their actions can have on the country’s image? Or are they just allowed to march in and shut a unit down all in the hope of sweating out a few people and greasing their own dirty palms?
It is high time that the majority government passes a law that mandates the ‘rewriting’ of laws that are over 25 years old. There are just too many cases today where the outdated laws of pre-independence (and some that even pre-dated to the birth of my great-great-grandfather) are being used to harass entrepreneurs, law abiding citizens and even party revelers from enjoying their ‘independence’.
The reason I choose 25 years is because it provides a balance between the generational change in India with the rapid change in the pace of technology and society. Unfortunately our legal system has passed its expiry date on both accounts and it is time for a radical change through the rewriting of this system for the youth of today to believe in the legal system and to agree to follow it.
To know how deep the malaise of outdated laws affect our ‘independence’ and outdate reality, just read this article from India Today. While the article only touches the tip of the ice-berg it should have further gone on to explain how the Indian Partnership Act was passed in 1932 and was last amended in 1983!
Why amend such old laws, they don’t change the intent of the law and neither do they capture the changes in the applicability of the law (can you imagine what a partnership meant in 1932 or even in 1983 versus what it means today?) for that matter imagine what was the intention when the Press and Registration of Books Act of 1867 was written… electricity was a privilege then and we are in the age of the e-book!
These laws aren’t just affecting our entrepreneurs, imagine what intention the Indian Divorce Act of 1869 wanted to achieve versus the reality today? What about the Indian Evidence Act of 1872! I don’t even want to read what those acts say except knowing that their entire intention is defeated when the intent with which an act was written is no longer a reality my generation or even the generation after me can imagine.
There are umpteen number of my friends, family and brother and sisters of my country that are breaking their heads and their spirit against the colonial laws created by the British curb Indians and in a way we are still enslaved to the draconian laws 68 years after our Independence. So Mr. Prime Minister before we attract billions, trillions and gazillions from China to Timbuktu… let’s clean up our judicial system and restore its faith and stature in the eyes of our generation.
A list of laws & acts governing us is available here