Jama-Kharchi and the Conversion of Black to White

For the uninitiated among us (and I am one) it seems there’s this concept called “Jama Kharchi”, which is about converting black money to white. Jama-kharchi , of “accomodating entry” companies which basically make two kind of entities meet:

  • One that wants to reduce its profits (and thus, taxes) by showing purchase entries
  • Two, that that wants to shore up sales because they will get higher credit

The Jama-kharchi companies will “accomodate” accounting entries that help both these companies and charge a 2% to 4% commission to be the go-betweeen.

Let’s say a company A wants to reduce profits but still wants to have the cash. It buys something from a Jama Kharchi company B, and that company (through conduits into other companies or directly) gives an unsecured loan, or buys shares of Company A. That way the company still has the money and managed to reduce its sales.

[…]

By |September 12th, 2014|StartupTax|2 Comments

SEBI Finalizes Angel Fund Regulations

SEBI has notified final regulations for angel funds. I have noted many of these in the past, so for background:

In brief, angel funds are now only allowed as an “Alternative Investment Fund” which requires registration.

  • Angel funds must pay Rs. 200,000 to register.
  • Such funds can raise funds of at least 25 lakh (2.5 million) per investor, and a minimum corpus of Rs. 10 crores. (100 […]
By |September 17th, 2013|Startups, StartupTax|Comments Off

Angel Fund Guidelines: Helps the Superangels, Keeps Out Smaller Investors

SEBI has introduced new guidelines for Angel Funds. As I’ve said recently, this is an absolutely important requirement in order for startups to avoid the “Startup Tax” (, a tax regulation that classifies investment as “income” if it is at a premium to the “par” value of a share of a company.

(Read the free Startup Tax e-Book)

The tax laws allow angel funds to skirt this rule, but what an angel fund actually means was left to SEBI. And this is what SEBI has said, in simple terms:

Angel funds a sub-category of SEBI AIF Cat-1, Like Venture Capital Funds with Only 25 Lakh Minimums

The SEBI Alternative Investment Fund (AIF) regulation is what allows pools of capital to be used in India to invest in anything. AIFs include Venture Capital Funds (VCFs) as a Category 1 player. An Angel fund will be a sub-category […]

By |June 26th, 2013|SEBI, Startups, StartupTax|Comments Off

Speculation: SEBI Angel Fund Rules Could Help Ease Startup Tax

The Finance Minister had in his budget speech mentioned that:

SEBI will prescribe requirements for angel investor pools by which they can be registered as Category 1 AIF venture capital funds.

(Read: Startups in Budget 2013, a Mixed Bag)

CNBC has the news that SEBI might announce the requirements on July 25 (speculation):

In an exclusive to CNBC-TV18, sources say the Sebi board may announce rules for angel funds on June 25. Some of these rules may include angel fund investment to be limited to Rs 50 lakh- Rs 5 crore; angel funds to be invested in a company for at least three years; angel investors to invest in companies not older than three years; investee company to be unlisted and with a maximum turnover of Rs 25 crore; the investee company may not be related to a group with a revenue of greater […]

By |June 20th, 2013|SEBI, StartupTax|Comments Off

Startups In Budget 2013, A Mixed Bag

What’s in it for startups? Last year, we had a horrible section (Read the full e-book) that still works against angel investors in early stage startups. (Angel investments would be taxed if they couldn’t prove that an investment had a sound valuation backing it – and early stage startups are wet-finger-in-the-air valuations)

The Return of the Rs. 1 Crore Angel, Or Something

In Budget 2013, there are some interesting changes. First, to solve the above problem in last year’s budget, this year the FM said that:

SEBI will prescribe requirements for angel investor pools by which they can be registered as Category 1 AIG venture capital funds.

This can be good or bad. Good because if AIFs are effectively governed like VCs, their investments don’t hit the wall that my last year’s rant was about.

Bad because of multiple factors:

  • Much higher regulation and transparency that […]

By |March 1st, 2013|Budget2013, Startups, StartupTax|1 Comment

Jagan-Srinivasan Enquiry Explains the Startup Tax

When the CBI investigated BCCI Chief N. Srinivasan’s company, India Cements, they seem to have uncovered why the “Startup Tax” was introduced in the budget. (Read Full Set of Posts) The company invested in companies owned by Jagan Reddy, son of the late YS Rajasekhara Reddy, who was the Chief Minister of Andhra Pradesh, in a way that the CBI says was a disguised bribe. From Firstpost:

According to the FIR, India Cements made following investments in Jagan Reddy’s Companies:

- Rs 5 crore in Carmel Asia Holding Pvt Ltd, one of the 36 companies created by Jagan Mohan Reddy. He paid Rs 252 per share, while the promoters and group companies had paid only Rs 10 per share.

- Rs 15 crore in Raghuram Cements Ltd (now called Bharathi Cements) purchasing 12,50,000 shares at a premium of Rs 110 in 2007.

- Rs 40 crore in Jagathi Publications, which owns Sakshi TV and newspapers.

And in return, according to the FIR, […]

By |June 9th, 2012|StartupTax|1 Comment

Startup Tax: Diluted To Allow "Angels"?

The FM, in his remarks while introducing the Finance Bill today, provided some relief to the startup community by potentially allowing angel investments to not attract the Startup tax.

(For More: Read the E-Book, and all posts)

It has been proposed in the Finance Bill that any consideration received by a closely held
company in excess of the fair market value  of its shares would be taxable.  Considering the
concerns raised by "angel" investors who invest in start-up companies, I propose to provide an enabling provision in the Income Tax Act for exemption to a notified class of investors

Let’s not rejoice too early. We don’t know what the enabling provision is, just  yet. I will post when I find out (and please, do let me know if you do!).

An angel investor isn’t […]

By |May 7th, 2012|Budget2012, StartupTax|Comments Off

FREE E-Book: The Startup Tax in India

I consolidated material from all the posts on the Startup Tax in India and put it into an easy-to-download E-Book (PDF). I hope you like it!

StartupTaxBig

As things change, I will update the E-Book.

By |March 27th, 2012|StartupTax|1 Comment

FAQ on the Startup Tax

Lots of questions have come in on the Startup tax post (Angel Investors Beware: Funding Startups Could be Classified as Income) and I’ve tried to address them here. The idea, for those who don’t have the time, is that investments in any company must now be “justified” to a tax officer, unless they are by a VC fund. If the tax officer finds that the money was more than “fair market value” using a set of criteria that are irrelevant to most tech startups today (valuing physical assets etc.), then whatever is extra will be recognised as “income” on the startup’s books, meaning they have to pay tax on it.

It’s Only Active In 2013-14!

The clause applies to “Assessment Year" 2013-14. In that year, you file taxes for 2012-13. It’s one of those strange budget things, but when they say assessment year they mean it applies to the year preceding it.

See the […]

By |March 21st, 2012|Budget2012, StartupTax|1 Comment

Ramadorai, Ex-TCS-CEO, Will Advise Govt On Startup Tax

The Startup Tax situation has elicited serious response. Pluggd.in has reported that the Ex-CEO of TCS, S. Ramadorai, has been asked to advise the government on the issue.

Indian government has asked S. Ramadorai, ex-CEO of TCS to advise the government on startup tax bill. S Ramadorai currently serves as an advisor to the Prime Minister of India in the National Council on Skill Development, Government of India. He holds a rank equivalent to an Indian Cabinet Minister.

More from ET: FinMin says New Safeguards For Angel Investors

The finance ministry has said it could bring in more safeguards in the income-tax law to ensure that genuine angel investors are not impacted by a budget proposal to tax exorbitant profits by venture capital funds, but effectively ruled out a rollback.

The use-case that the government is looking to plug is where a […]

By |March 21st, 2012|Budget2012, StartupTax|Comments Off

Startup Tax: Becoming a Venture Capital Fund

Also Read: Angel Investors Beware: Funding Startups Could be Classified as Income

Many investors have asked, privately, if they can set up a Venture Capital fund, because any company such funds invest in, will no longer get the startup tax.

Such VC funds have regulations from SEBI. You will want to read:

The burning questions, though are:

Who can apply?

Any company, trust or “body corporate” (typically, institutions). No LLPs, currently. No individuals.

Comapnies or trusts need to have their “main objective” as carrying on the activity of a venture capital fund. A company can never request offers from the general public (can only get money as private placements).

The directors or trustees must not have any litigation connected […]

By |March 19th, 2012|StartupTax|1 Comment

Private Cos: Investors Must Reveal Source Of Funds

Also Read: Angel Investors Beware: Funding Startups Could be Classified as Income

Yet another amendment in the budget will open a can of worms, though this one might seem roughly acceptable, even if it is a big bother. In the Budget, another unnoticed clause requires an unlisted company to know the source of the funds of every single investment of each investor. The only exception is for money received through venture capital funds.

In the Finance Bill, you will see this clause (Search for “section 68” – it is item no. 22, on page 10)

In section 68 of the Income-tax Act, the following provisos shall be inserted with effect from the 1st day of April, 2013, namely:—
“Provided that where the assessee is a company, (not being a company in which the public are substantially interested) and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any […]

By |March 18th, 2012|Budget2012, Startups, StartupTax|Comments Off

Startup Tax: Tax Dept Tells You How To Value Your Startup

We know now that the new amendment in the budget will attempt to tax angel investors that want to buy into a company at a “premium” valuation, a concept rife in the startup world.

The “Startup Tax” article has generated some excellent responses. Among them is Rajesh’s reply which I’d like to highlight in a separate post: Rajesh says:

You can always prove the FMV and we will hopefully know it in the fineprints. There is however an existing notification (NOTIFICATION NO 23/2010, Dated: April 8, 2010) for valuing unquoted shares and securities. You may find the details of this notification here – http://www.caclubindia.com/forum/notification-for-determination-of-fmv-u-s56-78062.asp.

If you check the last clause(c) for valuing unquoted shares and securities, the FMV of unquoted shares and securities, other than equity shares in a company which are not listed in any recognized stock exchange, can also be estimated to be the price it would fetch if sold in the open market on the valuation date […]

By |March 17th, 2012|StartupTax|Comments Off

Angel Investors Beware: Funding Startups Could be Classified as Income

Startups, founders and Angel investors, please note the change in Budget 2012 that has been slipped in, innocuously. An investment in any private company could be classified as “income” unless you can justify the investment and valuation to a tax officer. Such income is taxable.

Look at the “Memorandum” under section “Share premium in excess of the fair market value to be treated as income” (Page 8).

It is proposed to insert a new clause in section 56(2). The new clause will apply where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration
for issue of shares. In such a case if the consideration received for issue of shares exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be chargeable to income tax under the head “Income from other sources. However, this provision shall not apply where the consideration for issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund.

Usually a startup gets funding from an angel investor in exchange for equity. The valuation of the startup is usually based on an idea, with very little else to support it. (Hardly any computers or machinery or even hard investments by the founders). A new startup with an idea and perhaps a prototype built at home may get a Rs. 10 lakh funding from an angel investor for 10% of the company. […]

By |March 17th, 2012|Budget2012, Startups, StartupTax|27 Comments