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The budget 2022 is a much-awaited announcement, not just for the citizens of this country but also for various businesses and industries.
Every year, the budget allows for concerned parties to get a detailed analysis of the government’s expenditure and investment plan for the fiscal year.
It also gives an insight about the economic stance of the government and helps industries and businesses plan their strategy and future course of action. Talking about the tech and start-up space, 2021 has been an unprecedented year. With regards to funding and overseas listings, the sector has seen some major upticks, yet some grey areas continue to dominate this segment.
India had, as early as 1993, permitted an overseas listing of Foreign Currency Convertible Bonds (FCCBs) and Ordinary Shares [American Depository Receipts (ADR)/Global Depository Receipts (GDR)] through a depository receipt mechanism in popular stock exchanges such as London, Singapore, and New York (NYSE and NASDAQ).
Such DR’s were listed and freely traded in the overseas markets and till 2005 no Indian listing was required.
Two-way fungibility of ADRs/ GDRs/ FCCBs was also permitted. However, in 2005 the ADR/GDR/FCCB route was amended to restrict Indian companies from raising capital through a foreign listing without a prior or simultaneous domestic listing.
This was based on the need felt by the SEBI to regulate access to overseas listings. Although the Ministry of Finance (in May 2020) announced that Indian companies would be allowed to list their shares directly in foreign stock exchanges, there is still a lack of clarity regarding overseas listing rules. The legislation related to overseas listings is yet to be announced by the Government of India.
Expectations from budget 2022 on Direct Overseas Listing:
* Expedite the notification for the direct listing framework.
* Exempt direct listing overseas from the mischief of round tripping under RBI Rules. In other words, allow residents to participate (buy / sell) overseas listed stocks of Indian companies.
* Permit unlisted Indian companies to issue and list ADR/GDR in the IFSC (and perhaps overseas). This can be achieved easily (as it is a revert to the original regulatory position) with safeguards that can be brought about under Companies Act.
* Provide a limited period tax incentive of dividend and capital gains exemptions to all primary investments done into and by IFSC SPACs in Indian targets – for about the next two to three years.
This will promote usage of IFSC SPACs OR alternatively extend the lower tax rate of long-term capital gains as available to listed equity investments (currently taxed at 11.9%) to long term capital gains from sale of shares of start-ups. Currently the long-term tax rate can be as high as 28.5% for residents.
With over $38 billion in funding spread across 2,055 rounds, 12 initial public offerings, and the emergence of over 30 unicorns, 2021 proved to be a landmark year for India start-ups.
The government of India has always had its ears close to the ground, which is why this sector could not have been left unfettered and unregulated, especially having such huge financial implications.
The angel tax was introduced in the FY13 budget to stop money laundering by levying it on start-ups that raised equity funding at a price over and above the fair valuation of the shares.
Angel tax is the tax levied under section 56(2)(viib) of the Income Tax Act 1961 (“the Act”), on the capital raised by privately held companies via the issue of shares to a resident, the consideration for which exceeds the face value and the Fair Market Value (FMV) of the shares issued.
The name is influenced by those wealthy individuals (“angels”) who invest heavily in risky business and start-up ventures, in the initial stages.
In 2019, finance minister Nirmala Sitharaman announced an exemption for DPIIT - registered start-ups from the 30% angel tax levied for receiving investment against the issuance of shares which exceeds the fair market value.
Expectations from budget 2022 on Angel Tax and other issues:
* Angel tax exemption for shares issued by start up at premium: Remove the threshold for Angel tax exemption for funds raised from residents. This is currently capped at Rs 25 crore (post issue of shares including premium).
* Extend the tax holiday benefit of start-ups to partnership / LLP form of entities. Currently only company form is eligible for tax holiday benefits.
* For bootstrapping, extend the current capital gains tax exemption given to sale of immovable property that is re-invested in a recognised start-up to sale of shares of other start-ups as well. (So, if a promoter sells their shares in a start-up and reinvests the capital gains into another start-up, allow a tax exemption for such disposal).
* Improve patent box regime to make India an attractive place for IP ownership and exploitation. Current provisions limit the patent box regime (tax at rate of 10%) to royalty form of Income only. This regime should include all forms of income (including business income) derived from exploitation of any IP (extended to software/ copyright and not just to patents).
* Supplies by Indian entities to overseas branches are exempt from GST, hence, GST on procurements becomes a cost. Providing refund of GST credit should be considered in case of supplies to overseas branches, which currently is a substantial cost for such Indian entities.
* Do away with the limited definition of “Industrial Undertaking” in Section 72A of Income Tax Act, so that all mergers, including those in the software / IT sector are eligible for carry forward losses and unabsorbed depreciation.
This article was originally published on The Times of India.
