In September 2017, Nikunj Bubna was in the midst of raising another round of funds for the customer engagement and acquisition platform company he founded—Whats Extra India Private Limited. He had raised Rs 1.50 crore ($215,070) from angel investors nearly three years ago and signed up over 100 brands on his platform. His platform was one, where, while a customer made a payment, suggestions would pop up for items to be added to the purchase. Business was good. But there was trouble brewing. Except, Bubna didn’t know it yet.
In November-December 2016, he received a notice from the income tax office. So he sent his chartered accountant (CA) to the income tax officer. The tax officer wasn’t convinced though about the valuation of his company in the seed and angel rounds. Bubna tried explaining why his investors were ready to pay a premium on the face value of the shares of his company that continued to make losses. He explained that it takes time. After all, he was creating a platform that will make money once there are enough people on board. That’s how startups work, he told this reporter over the phone. The losses are front-ended so that the company makes profits later.
“We had devised a system where we had 103 brands signed up,” he says. “We were operating in over 450 stores in Bombay.”
Bubna was in the midst of building an upgrade of the product and he needed more money to expand in September 2017. But all that came to nothing. By January 2018, he ran out of money and shut his business down. His investors didn’t fund the next round. He couldn’t file an appeal against the tax demand, a number we’ve calculated at Rs 50 lakh ($71,906) including interest for ease of explanation in the story. (Bubna requested that the actual figure not be shared.) To appeal he would have had to pay 20% of the amount of the demand. He couldn’t run his business and fight the case.
Essentially, the taxman wondered how a loss-making company would be a viable investment opportunity for investors. Why would a company that is not making money command a premium when investors buy more shares in it?
Using a legal provision meant to catch illicit money laundered by inflating share prices of companies when they are sold, income tax officers across India have been issuing notices to thousands of entrepreneurs over the past year. All of them had to answer one question: why is someone funding your losses? Why are your investors buying your equity shares at a premium when the business isn’t doing well?
Many entrepreneurs, over the last 3-4 months, have taken to social media to voice their anguish. There has been panic that the government—which had, in April 2018, promised not to take coercive action and impose the dreaded ‘angel tax’ on startups—is out to get them.