The Indian startup ecosystem players have reasons to be happy with the Budget 2024 for doing away with the angel tax, which was levied on money raised by companies from angel investors, for all categories of financiers. This move is a major encouragement for startup investments, easing the tax burden, thereby paving the way for India to become a global innovation hub, led by startups. Angel tax (income tax at the rate of over 30 per cent) refers to the tax that the government imposes on funding raised by unlisted companies, or startups, if their valuation exceeds the company’s fair market value. Union Finance Minister Nirmala Sitharaman in a bid to strengthen the startup ecosystem and foster innovation across the country has abolished angel tax which clearly shows the government’s commitment to nurture startups and make India a hub for startups. The abolition of angel tax is a critical move, providing much-needed relief to startups.
Section 56(2)(viib) of the Income Tax Act provides that the amount raised by a startup in excess of its fair market value would be deemed as income from other sources and would be taxed at 30 per cent. Touted as an anti-abuse measure, this section was introduced in 2012. It is dubbed as ‘angel tax’ due to its impact on investments made by angel investors in startup ventures. The primary objective of angel tax was to check money laundering practices through investments in startups. It also aimed to catch bogus firms. However, the premium paid by investors was considered as income, taxable at around 31 per cent, by tax authorities. This caused a lot of problems and heartburn for the startup ecosystem. The removal of angel tax and support for prototypes will bolster local R&D, product innovation and the startup ecosystem.
The abolition of angel tax will further ease the funding winter for the Indian startup ecosystem as the tax burden will go away for foreign investors. The Department for Promotion of Industry and Internal Trade (DPIIT) has emphasised that the pipeline of funds should get better with abolition of the angel tax. The Indian private equity and venture capital investments in 2023 stood at $39 billion compared to $62 billion in 2022. This decline was aggravated by the funding winter that began in 2022 and the implications of the angel tax, which was also levied on foreign investors. Despite these challenges, the startup ecosystem has significantly contributed to the country’s GDP. The angel tax exemption for investors will go a long way in clearing out the funding winter in India. It is also going to enable change-hungry, homegrown startups to receive funding through domestic and foreign investments, creating more jobs in the country.
