Comment on Bootstrapping vs Funding - a tax arbitrage

Romesh S A Sankhe commented on 08 Aug 2020, 09:40 AM

Hello Mr. Kamath,

Well articulated & thank you for sharing your perspective.

Tax arbritrage on dividends may not be a primary factor for Startups at all the times. Tax on dividends can be mitigated by Salary to Promoters which will give deduction to Company & tax in the hands of Promoter resulting into marginal net tax impact. Later Prometers can sale their stake (or buyback) & be taxed as Capital Gains like investors.

Startups who are capital intensive or having longer gestation period due to initial losses needs cost free capital (vs interest bearing loan) hence they are forced to opt for Capital because most people may not pour in all their owner capital on a busienss idea (including of their own) due to uncertainty.

Tax rates in India nowadays are reasonable however most of the Startup Promoters ignores (or miss) the effective Entity & Transaction structuring (including IP ownership planning) in initial stages & hence faces difficulties later when Company grows exponentially/rapidly.

Also with recent changes of taxability of dividends in the hands of shareholders (which was earlier exempt), more listed companies in India may choose not to declare dividends like in USA, etc.

P.S. Tax is on income & it’s a certainty as well as our responsibility towards Source Nation, however if it’s planned considering the life cycle of entity/transaction then it can be optimally mitigated.

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