Angel tax-hit VCs, SpiceJet woes, BYJU'S turbulent times, and more
The Federal brings you the latest business stories on Friday (June 2).
VCs hit by angel tax seek relaxation in norms from CBDT
Several venture capital (VC) funds backing Indian start-ups are considering approaching the Income Tax Department in response to excluding investor-friendly jurisdictions from the list of countries not attracting angel tax.
The Central Board of Direct Taxes (CBDT) issued a notification regarding angel tax, stating that sovereign wealth funds, pension funds, and SEBI-registered portfolio investors from 21 countries and sovereignties would be exempt from angel tax charges. However, this list did not include certain tax havens including Mauritius, Singapore, the Cayman Islands, and the Netherlands. VC firms often establish funds in these jurisdictions to avoid attracting angel tax on their investments in Indian start-ups. Excluding these tax havens has raised concerns among VC funds operating in India.
To address this issue, these VC funds are reportedly planning to approach the Income Tax Department to seek clarification or reconsideration of the list of countries eligible for angel tax exemptions. In addition, they may argue that investor-friendly jurisdictions should also be included to ensure a conducive investment environment and attract foreign investment into Indian start-ups.
What it implies: There needs to be more clarity regarding the angel tax and how it gets implemented. The ambiguity regarding its interpretation needs to be clarified so that the investment climate in the country improves.
Section 56(2)(viib) of the Income Tax Act, commonly known as the angel tax, was introduced in 2012 as an anti-abuse measure to discourage the circulation of black money and shell companies.
It applies to unlisted companies and is triggered when the value of shares issued to investors exceeds their fair market value (FMV). Under the angel tax provision, if the share value is less than the FMV, the difference between the FMV and the actual price is treated as “income from other sources” for angel investors. This additional income is then subject to a tax rate of 30.9 per cent as per the prevailing tax laws.
The intention behind this provision was to prevent the undervaluation of shares and curb the practice of generating unaccounted funds by issuing shares at a premium. However, the enforcement and application of angel tax have been a subject of concern and controversy in the start-up ecosystem.
There have been instances wherein assessing officers (AOs) have applied the angel tax provision indiscriminately, leading to legitimate start-ups and investors being subjected to tax demands. This has resulted in grievances and criticism from the start-up community, as the provision was initially intended to target abusive practices rather than genuine investments.
It is important to note that the Indian Government has taken steps in recent years to ease the burden of angel tax on start-ups and investors. Exemptions have been provided to specific categories of investors and start-ups fulfilling certain criteria.
Additionally, the CBDT has issued guidelines and instructions to AOs to ensure a more fair and transparent assessment process. However, it is still possible that some non-resident investors may face challenges and potential tax liabilities, despite the exemptions, depending on how AOs exercise their discretion. Therefore, the issue of angel tax and its impact on the start-up ecosystem continues to be a matter of discussion and advocacy for reform among various stakeholders in India.
Delhi High Court asks SpiceJet to pay ₹380 cr to former promoter Kalanithi Maran
The Delhi High Court has ordered Indian budget airline SpiceJet to pay ₹380 crore (approximately $52 million) in outstanding dues to Kalanithi Maran, chairman of Sun Group and the airline’s former promoter, according to a report in Bar & Bench. The court’s decision comes after Maran claimed that SpiceJet violated a previous court order arising from a share transfer dispute between the parties.
What it implies: Spicejet’s quarter three results show that its net profit of ₹110.5 crore, a 160 per cent increase year on year, was driven by other income. The other income of ₹505.5 crore helped the airline post a profit after losses for three consecutive quarters.
The latest court order, if implemented, will create a bigger hole in the profit & loss account of the company.
But here is the lowdown on what led to this situation: The share transfer dispute between Maran and SpiceJet dates back to a 2015 sale purchase agreement that resulted in a change in ownership of the airline from Maran to co-founder Ajay Singh. Maran filed the suit to enforce the terms of the agreement after SpiceJet failed to issue warrants or allot preference shares as agreed upon.
In October 2020, Maran sought attachment of the shareholding of SpiceJet promoter Ajay Singh after the airline failed to deposit ₹243 crore in his favour. The Delhi High Court granted Maran’s plea and directed the amount to be deposited within three weeks. SpiceJet’s application to modify the order was rejected.
The Supreme Court subsequently upheld the Delhi High Court’s decision and directed the encashment of a bank guarantee to pay Maran. The court also ordered SpiceJet to pay ₹75 crore within three months for interest liability. However, Maran’s counsel argued before the High Court that the interest liability had increased from ₹362 crore to ₹380 crore and that the ₹75 crore had not been deposited.
SpiceJet contended that it had filed an application with the Supreme Court seeking an extension of three months to pay the remaining amount. Maran disputed this claim. Considering the arguments, the Delhi High Court directed SpiceJet to deposit the entire outstanding amount and file an affidavit of assets within four weeks. The case is scheduled to be heard again on September 5, 2023.
BYJU’S lenders scrap talks to restructure $1.2 billion loan
The talks were called off after the creditors moved to court and accused the firm of hiding $500 million of funds raised. Lenders can now sell the term loan B securities of the firm as the restraint that came as part of the negotiations is lifted, a Bloomberg report said.
What it implies: Once the toast of the investor community, BYJU’S, considered the world’s most-valued edtech start-up, is facing more headwinds as it struggles to raise more funding. It will have to return to the drawing board to restructure its operations and take some hard decisions on its business ventures. Anything short of that will make it more difficult for BYJU’S to raise funds and sustain its operations fully.
BYJU’S valuations are tanking, with the US-based investment management firm BlackRock being the latest to slash its valuation by 62 per cent to $8.4 billion. In March 2022, edtech start-up BYJU’S announced a funding round of $800 million, valuing the company at $22 billion. The edtech major laid off 2,500 employees while hiring 10,000 teachers for India and overseas operations.
However, the Enforcement Directorate (ED) recently conducted search operations at BYJU’S premises and revealed that the company is under scrutiny regarding foreign direct investment (FDI) amounting to ₹28,000 crore (approximately $3.7 billion) received between 2011 and 2023.
The agency also stated that BYJU’S remitted ₹9,754 crore (roughly $1.3 billion) to various foreign jurisdictions during the same period as overseas direct investment. The ED’s investigation suggests that the agency is examining the FDI and overseas remittances made by BYJU’S during the specified timeframe. It is important to note that these investigations are ongoing, and the outcome and implications are yet to be determined.
Television sets, laptops, smartphones to cost more as open cells get costlier
A report in the Business Standard has said that television manufacturers have started to increase prices as open cell prices get costlier.
What it implies: Open cells refer to multiple layers that sit between the backlight and the external frame of a television. The Government had removed import duties on open-cell LED panels used in the production of television sets. However, this move did not lead to any price cuts, and now, with the open cell panels price increasing by 15 per cent, the TV manufacturers have started passing on the additional cost to the customers.
Open cells make up nearly 60 per cent of the cost of manufacturing a TV set. Currently, open cells panels are not manufactured in India. The LED TV market in India is estimated to be around 15 million units.
OFD platforms’ softened approach during IPL 2023 leads to a modest 7 % spike in their business
The Indian Premier League (IPL) stands as one of India’s mainstream cricket tournaments, captivating millions of viewers. This extensive viewership has transformed the IPL into a highly sought-after advertising opportunity for businesses, particularly online food delivery (OFD) platforms.
However, in their continued stride towards profitability, prominent OFDs adopted a different marketing approach during IPL-2023, opting for muted campaigns. They implemented subtle and low-key strategies rather than relying on extravagant and attention-grabbing advertisements. This decision resulted in a modest 7 per cent spike in OFD business during the IPL season.
“During the IPL seasons from 2017 to 2020, OFD giants made a significant presence on prime-time television through their advertisements. They enticed viewers with attractive discounts ranging from 50 to 60 per cent at a wide array of restaurants,” said Kushal Bhatnagar, Associate Partner, Redseer Strategy Consultants, one of the leading tech and data-driven consultancy firms.
“Additionally, they integrated their offerings with OTT platforms and created customized advertisements for maximum impact. These efforts even led to a more than 50 per cent spike in the IPL 2020 season. However, in the 2023 IPL season, there was a noticeable change in approach,” concluded Bhatnagar.
Despite the limited action by OFD platforms, IPL 2023 generated online food ordering use cases among tier 2+ consumers, wherein the spike was almost 2.5x of mature consumers in the metro/tier 1 markets. This hints towards the ability of spike events to drive habit formation among not-so-mature users in India. Targeting these users via effective spike event campaigns could accelerate the adoption of OFD platforms in deeper pockets in the country.