Mohandas Pai, a well-known personality in India’s IT and financial worlds, has joined the list of stakeholders that have publicly called for the Modi 3. It explained that the current government needs to make certain bold moves to reignite the startup scene across the country. The Angel Tax is one topic Pai expressed deep concern in his more recent call for action; He also suggested that seed investment should be exempted and that a ₹50,000 crore fund should be floated towards startups. He further says that these are the things that are very much required for sustaining and furthering the growth of start up industries now emerging in India.
The Angel Tax was imposed in the year 2012 with an aim to address the magnitude of money laundering which was being camouflaged under high startup valuations. But has remained a significant irritant for Indian startups, and a source of ambiguity, that is, it has cut investment; flows. It is charged based on the amount of capital raised by the unlisted companies that use the sale oft shares at more than the fair value of the shares. This policy has been especially painful to seed-stage startups who look for investors, such as angel investors who invest in ideas and who, unlike mature investors, do not seek quick returns, but, on the contrary, are ready to wait for the long-term profit.
These sentiments are echoed in Pai’s plea to do away with Angel Tax as they act as a detriment to growth due to enormous financial and regulatory costs for the young enterprises. The subject tax has therefore shown a coefficient of uncertainty and caused compliance issues that have made potential investors, both domestic and foreign, hold back from investing in Indian startups. The abolition of this tax can have the potential of reducing one of the constraints to funding and promote a more suitable environment that holds potential for the growth of young firms.
Besides this, Pai has also urged to do away with Angel Tax and also recommended that a fund of ₹50,000 crore must be set up exclusively for the startups. This fund will augment itself as the rich resource of necessary funds to the early stage startups so that they can innovate or expand or even compete for the international market.
The creation of such a fund aligns with Pai’s vision of transforming India into a leading global startup hub. He envisions a future where India hosts over 100,000 startups by 2025, generating a cumulative value of $1 trillion and creating 3.5 million jobs. The proposed fund would play a pivotal role in realizing this vision by offering startups the financial backing needed to navigate the challenging initial phases of their business lifecycle.
Pai’s optimistic outlook for the Indian startup ecosystem is not without basis. Over the past decade, India has witnessed an extraordinary surge in startup activity, marked by the emergence of numerous unicorns and a vibrant entrepreneurial spirit. As of 2021, India had over 60,000 startups, contributing significantly to job creation and economic growth.
The inflow of capital, particularly from international investors, has been a major driving force behind this growth. In 2020 alone, Indian startups attracted $70 billion in funding, with only a small fraction coming from domestic sources. Pai emphasizes the need for more Indian capital to be invested in startups to ensure that the benefits of this growth are retained within the country.
For the startup ecosystem to thrive, supportive government policies and a stable regulatory environment are essential. Pai’s recommendations highlight the importance of a policy framework that encourages innovation, reduces bureaucratic hurdles, and provides clear and consistent guidelines for investors and entrepreneurs alike.
The proposed startup fund and the repeal of the Angel Tax are steps in this direction. By providing startups with the necessary financial support and removing obstacles to investment, the government can catalyze further growth and innovation. Moreover, these measures can help position India as a preferred destination for global investors looking to tap into the dynamic and rapidly expanding Indian market.
Mohandas Pai’s call for the repeal of the Angel Tax and the establishment of a ₹50,000 crore startup fund underscores the critical need for proactive policy measures to support India’s startup ecosystem. As the country aims to solidify its position as a global startup powerhouse, these initiatives could provide the much-needed impetus for innovation, investment, and growth. By fostering a more favorable environment for startups, India can unlock unprecedented economic opportunities and drive sustainable development in the years to come.
