Issue of SAFE Notes in India

To boost up the Indian financial economy and to promote foreign investment in startup companies, the government introduces a concept of SAFE Notes in the form of Convertible Notes by amending the Companies Act, 2013 / related rules and Foreign Exchange (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000, w.e.f January 10, 2017, which allow Startup Companies to issue SAFE Notes in the form of Convertible Notes to an eligible Investor. Startup Companies use Convertible Notes to raise money in their early stages. It is a kind of financial instrument which consists of both debt as well as equity components.

SAFE Notes in the form of Convertible notes may be issued to both person’s resident in India and persons resident outside India. SAFE Note means Simple Agreement for Future Equity. SAFE is an agreement between Investor and Investee Company whereby an Investor invests a certain amount in Investee Company on the terms and conditions mentioned in the SAFE Agreement. Invested amount is either repayable to investors or convertible in Equity Shares of the Investee Company on the happening of a certain event mentioned in SAFE Agreement or after expiry of a certain period.

As per rule 2(1)(c)(xvii) of The Companies (Acceptance of Deposits) Rules, 2014

Convertible Note means an instrument evidencing receipt of money initially as a debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of the start-up company upon occurrence of specified events and as per the other terms and conditions agreed to and indicated in the instrument.

Meaning of Startup Company

Start-up Company” means a private company incorporated under the Companies Act, 2013 or Companies Act, 1956 and recognized as such in accordance with notification number 16[G.S.R. 127 (E), dated the 19th February, 2019 issued by the Department for Promotion of Industry and Internal Trade];

Difference between SAFE Notes and Convertible Bonds

Convertible Bonds and SAFE Notes in the form of Convertible Notes are very similar in nature. Both include debt as well as equity components. But the major difference is that SAFE Notes can only be issued by Startup companies.

Condition to be satisfied for issuing SAFE notes in the form of Convertible Notes by Startup

  • Minimum value of Investment in single transaction is Rs. 25,00,000/- or more.
  • Time period within which that Investment is converted into Equity shares is 5 years (increased to 10 years).

 Points to Remember

  • A person resident outside India (other than an individual who is a resident of Pakistan or Bangladesh or an entity or company which is registered and incorporated in Pakistan or Bangladesh), may purchase SAFE Notes from an Indian startup company.
  • A startup company engaged in a sector where investment by a person resident outside India requires Government Approval, may issue SAFE Notes with prior permission of the Government. Issuance of equity share against such SAFE Notes shall be in compliance with direct entry route, sectoral caps, pricing guidelines and other attendant conditions for foreign investment.
  • A startup company issuing SAFE Notes to a person resident outside India shall receive the amount of consideration by inward remittance through banking channel or by debit to the NRE/FCNR (B)/Escrow accounts maintained by the person in accordance with Foreign Exchange Management (Deposit) Regulation 2016. Repayment or sale proceeds also to be made through the same route by crediting to NRE/FCNR (B)/Escrow accounts.
  • A Non-Resident or an overseas citizen of India may also acquire SAFE Notes through non-repatriation basis in accordance with Schedule 4 of these Regulations. A person resident outside India may acquire or transfer by way of sale, Convertible Notes, from or to a person resident in or outside India, provided the transfer takes place in accordance with the entry routes and pricing guidelines as prescribed for capital Instrument.

Reporting required under FEMA Act / RBI

The Indian startup company issuing SAFE Notes in the form of convertible notes to persons resident outside India shall report such inflow to the Authorized dealer bank within 30 days of receipt of funds against issue of such SAFE Notes.

Consequences of delay in reporting

If delay in reporting to authorized dealer bank as per the time prescribed by RBI then person shall be liable for payment of late fees. The payment of late submission fees is an additional option for regularizing reporting delays without undergoing the compounding procedure. Amount of late submission fees is changed from time to time by the RBI after consultation with the Central Government.

Key Takeaways

Concept of SAFE Notes is relatively new in India and gaining momentum. A key feature of these policy announcements has been to boost fundraising options for startups by permitting startups to raise funds through issuance of SAFE Notes which was earlier not allowed. This policy relaxation will help innovative startups raise capital in their initial stage and explore funding opportunities with both domestic and foreign investors. The crux of this policy is to attract foreign investors towards investing in India.

About the Author: This article is contributed by CA Rajeev Gupta, Partner – SIGMAC & Co, Chartered Accountants, Location- Delhi NCR and Gurgaon.

In case of any query please feel free to contact us at: rajeev@sigmac.co.in

For more information and updates, you can contact CA Rajeev Gupta or visit our website https://www.sigmac.co.in/my-blog/

Disclaimer: This content has been prepared for general guidance of the reader on the matters of interest only. It should not be treated as professional advice. You should not act upon the information contained in this article without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information or provisions of the law contained in this article. Author and/ or SIGMAC & Co., Chartered Accountants, its members, employees and agents accept no liability, and disclaim all responsibility for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this article or for any decision based on it.

Cryptocurrency and its Taxability in India

Cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Cryptocurrency are decentralized networks based on block chain technology. Cryptocurrency is not issued by any Central Authority, so there is no interference of the Government in their trading. A Cryptocurrency is a form of digital asset based on a network.

Crypto” refers to the various encryption algorithms and cryptographic techniques that safeguard these entries, such as elliptical curve encryption, public-private key pairs, and hashing functions. Cryptocurrencies can be purchased from Crypto exchange.

Types of Cryptocurrencies

 

There are many different types of Cryptocurrency, but these nine are among some of the more well-known currencies

  • Bitcoin (BTC)
  • Ethereum (ETH)
  • Tether (USDT)
  • Binance Coin (BNB)
  • Ripple (XRP)
  • Tera (LUNA)
  • Dogecoin (DOGE)
  • Shiba-inu (SHIB)
  • Litecoin (LTC)
  • Ethereum Classic (ETC)

How to Buy Cryptocurrency

 

Any investor can purchase Cryptocurrency from popular crypto exchanges such as Coinbase, apps such as Cash App, or through brokers.

Is Cryptocurrency Legal in India?

 

Taxing Cryptocurrencies does not give them legal status in the country, finance minister Nirmala Sitharaman clarified in the Parliament. It’s the country’s sovereign right to tax Cryptocurrency transactions.

Advantages of Cryptocurrencies

 

  • Cheaper and faster money transfers with decentralized systems.
  • No involvement of Third Party such as Banks.
  • Investment in Cryptocurrency generates huge profits.

Disadvantages of Cryptocurrencies

 

  • Cryptocurrency includes high price volatility that can lead to major loss to the investor
  • Leaves a digital trail which allows authority to track financial transactions.
  • Because of digital nature transactions can be hacked.

Tax Implications on Virtual Digital Asset

 

Following section 115BBH shall be inserted by the Finance Act, 2022, w.e.f. 1-4-2023:

Tax on income from virtual digital assets:

(1) Where the total income of an assessee includes any income from the transfer of any virtual digital asset, notwithstanding anything contained in any other provision of this Act, the income tax payable shall be the aggregate of—

(a)  The amount of income tax calculated on the income from transfer of such virtual digital asset at the rate of thirty per cent; and

(b)  The amount of income tax with which the assessee would have been chargeable, had the total income of the assessee been reduced by the income referred to in clause (a).

(2) Notwithstanding anything contained in any other provision of this Act,—

(a) No deduction in respect of any expenditure (other than cost of acquisition, if any) or allowance or set off of any loss shall be allowed to the assessee under any provision of this Act in computing the income referred to in clause (a) of sub-section (1); and

(b) No set off of loss from transfer of the virtual digital asset computed under clause (a) of sub-section (1) shall be allowed against income computed under any provision of this Act to the assessee and such loss shall not be allowed to be carried forward to succeeding assessment years.

(3) For the purposes of this section, the word “transfer” as defined in clause (47) of section 2, shall apply to any virtual digital asset, whether capital asset or not.

Key points about Virtual Digital Asset from Budget speech given by Finance Minister 

 

There has been a phenomenal increase in transactions in virtual digital assets. The magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime. Accordingly, for the taxation of virtual digital assets, the Finance Minister proposes that any income from transfer of any virtual digital asset shall be taxed at the rate of 30 per cent.

  • No deduction in respect of any expenditure or allowance shall be allowed while computing such income except cost of acquisition. Further, loss from transfer of virtual digital assets cannot be set off against any other income.
  • Further, in order to capture the transaction details, the Finance Minister  proposes to provide for TDS on payment made in relation to transfer of virtual digital assets at the rate of 1 percent of such consideration above a monetary threshold.

Points to Remember

 

  • TDS needs to be deducted under section 194S by the person paying for the Transfer of Cryptocurrency if the consideration paid during the FY does not exceed Rs 50,000 (in case of specified person) or Rs 10,000 (in any case other than a specified person). Provisions of Section 203A (Tax Deduction and Collection number) and 206AB (higher TDS rates for non–filers of ITR) will not be applicable to payments made by specified persons.
  • Assesses is not allowed any basic exemption limit in case the only income during the year is from the transfer of digital assets.
  • Meaning of Specified Person: For the purposes of this section “specified person” means a person,—
(a)   being an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business carried on by him or profession exercised by him does not exceed one crore rupees in case of business or fifty lakh rupees in case of profession, during the financial year immediately preceding the financial year in which such virtual digital asset is transferred;
(b)   being an individual or a Hindu undivided family, not having any income under the head “Profits and gains of business or profession”.’.

Key Takeaways

Cryptocurrency is a digital virtual asset which is very popular nowadays. Cryptocurrency has its own advantages and disadvantages. Before investing in a cryptocurrency, be sure you understand how it works, where it can be used, how to exchange it and how it is taxed in India. In some cases, rules made under FEMA by RBI are also involved due to involvement in Foreign Currency in the transaction of sale and purchase of Cryptocurrency. Use a trustworthy wallet. It is going to take some research on your part to choose the right wallet for your needs. Have a backup strategy. Think about what happens if your computer or mobile device (or wherever you store your wallet) is lost or stolen. People should do all the research before investing. And should be aware of all risks that arise from trading in Cryptocurrency.

About the Author: This article is contributed by CA Rajeev Gupta, Partner – SIGMAC & Co, Chartered Accountants, Location- Delhi NCR and Gurgaon.

In case of any query please feel free to contact us at: rajeev@sigmac.co.in

For more information and updates, you can contact CA Rajeev Gupta or visit our website www.sigmac.co.in

Disclaimer: This content has been prepared by the author for general guidance of the reader on the matters of interest only. It should not be treated as advice for investing in Cryptocurrencies. It should not be treated as professional advice. You should not act upon the information contained in this article without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information or provisions of the law contained in this article. Author and/ or SIGMAC & Co., Chartered Accountants, its members, employees and agents accept no liability, and disclaim all responsibility for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this article or for any decision based on it.