By Devendra AgrawalFor Investors: The recent Supreme Court judgement that has gone against Tiger Global may dampen the confidence of any global investor because anything that’s agreed in the past is open for interpretation. And while that may lead to short-term benefit of recovering the taxes from one investor, in the long run it might have a negative impact on the larger investor community. They may feel the country may not be trusted with the laws laid by the previous governments. The budget should provide clarity or simplify the laws, especially for global investors.
For angel investors: Ideally, the government should unleash private capital for startups. The recent SEBI regulations for angel investing have increased the accreditation. Earlier, any individual/HUFs/Family Trusts/Sole proprietorships with net worth greater than Rs 2 crore (excluding the value of their primary residence) could be angel investors. Now, the net worth has to be equal or greater than Rs 7.5 cr, out of which at least Rs 3.75 cr is in the form of financial assets (excluding the value of their primary residence). If someone keeps PPP (purchasing power parity) in mind, it is ridiculously high and removes a number of people from the purview of investing.
The government should definitely make a uniform policy for accredited investors but with fewer norms. And before angel investors, I think, the government should look at F&Os as they are even riskier and more speculative. Angel investing drives capital formation.
Bring sale of AIF units at par with sale of shares. When any investor invests in any Alternate Investment Fund (AIF), the investor gets units of AIF. Now, often these investments are illiquid and AIF units can't be easily transferred. If an investor gets a willing buyer to transfer the AIF unit, another challenge is that AIF units are valued on Fair Market Value (FMV).
In comparison, when underlined securities like shares in a company are sold, the transaction does not need to be at FMV, as long as they are sold above book value.
So, there's a disparity between sale of IAF units vs sale of shares of underlying companies held by these AIFs.
Doing away this disparity can bring selling of AIF units at par with selling shares and would increase liquidity in a situation where an investor in AIF wants to sell AIF units.
This would definitely bring more liquidity, increase participation of investors in alternate investment funds.
This is completely as per the tax laws of the country. It's just that the finance ministry has not taken this into consideration in record.
Government as venture debt provider. The government recently approved Rs 5,000 crore in equity support for the SIDBI to help expand credit flow to the MSME sector. The government invests in startups at a 6% rate with secured assets. To help more startups raise capital from the government and for the government to benefit from it, the government may consider investing at an increased rate – 8% – but without a secured asset as long as the startup is certified and thoroughly evaluated.
This could help in bringing down India’s very high venture debt, at 13-18%. The government could provide, say, a tech-driven company which has built a prototype, an 8% yield and can have a warrant structure. So that such a portfolio asset has mortality. Those warrants will yield a much higher rate of return even if a small percentage, like less than 10% of these companies, become wildly successful. So, the government could become a de facto venture debt provider or a collateral-free loan provider.
Invest wisely in deep tech: The government recently built a Rs 1 lakh crore fund for deep tech without having a very clear definition of deep tech. This amount is slightly on the higher side in terms of deep tech. The government could probably allocate a certain portion of this fund towards deep tech and the remaining fund could be allocated towards other avenues as well.
For taxation: We should applaud the Finance Minister and the government for two big releases. First, for rationalizing taxes to INR 12 lakh for the common man. Second, the GST reform. However, there are two recommendations that I would like to make:
a) Introduce taxation at household level. India follows an individual-focused income tax system, where each person’s annual income is evaluated and then taxed.
Introducing taxation at household level will give assesses the scope for rationalizing/reducing their tax burden. Assesses should have the option of filing their returns as a household or as an individual.
If the cumulative income of a household is lesser than a particular threshold, then taxation should be lesser. For example, if a household consisting of a married couple--where both husband and wife are earning—has a cumulative income of Rs 30 lakh then the tax rate could be 20% and not the current 30%.
The idea behind household-level taxation is that the family’s ability to pay depends on the shared expenses, not just individual income. This concept could definitely be explored and introduced.
b) Widen India’s tax net. Less than 4% of the population pays income tax in India. This increases the tax burden on the salaried class, middle class. In comparison, ~60% of households in the US pay federal income tax and ~10-14% of the Chinese working population pays income tax. The government and other stakeholders should find a way to bring more working people under the tax bracket to reduce the overall tax burden on the salaried class. I feel one way to do this could be to incentivize high tax payers by publicly recognizing and rewarding them.
(Devendra Agrawal, Founder, Dexter Capital Advisors, a boutique investment bank)