Union Finance Minister Nirmala Sitharaman on Tuesday delivered welcome news for the start-up community by abolishing the angel tax in the Union Budget 2024-25 for all classes of investors. This long-awaited move is expected to significantly bolster early-stage funding and invigorate India's startup ecosystem.
In addition to scrapping the angel tax, Sitharaman announced a reduction in the corporate tax rate for foreign companies to 35 per cent, aiming to make India a more attractive destination for international investors.
Impact On Startups And Investors
The abolition of the angel tax is a major relief for startups, particularly those in early stages that depend heavily on external funding. The tax often led to disputes over valuations, discouraging potential investors. Industry experts believe this move will attract further domestic and foreign capital into India's burgeoning startup ecosystem.
Anjali Bansal, Founding Partner at Avaana Capital says, “Recognising the invaluable contributions of the alternative assets and private capital industry, the government's removal of the 'Angel Tax' is a significant step forward. This acknowledgment by the Honorable FM underscores the pivotal role venture capital plays in fostering enterprise creation and innovation. It will undoubtedly attract further domestic and foreign capital into India's burgeoning startup ecosystem, especially in frontier technology sectors like deep tech, climate tech, and agri-tech. This move integrates into the journey of Viksit Bharat.”
By eliminating the tax, the government acknowledges the significant contributions of the alternative assets and private capital industry, which play a pivotal role in fostering enterprise creation and innovation. This policy shift is expected to benefit frontier technology sectors integrating into the broader vision of a prosperous and technologically advanced India.
Aditya Sarda, Senior VP - Investments at BlackSoil comments, "Angel tax being abolished is a welcome move by the honourable finance minister. While the tax's genesis was to prevent money laundering in certain cases, it had morphed into a more significant issue for the start-up ecosystem. Genuine start-ups and investors were collateral damage by this law.
However, it is perplexing why the government did not choose to resolve this issue completely by making this a retrospective change. This change would affect ongoing cases; however, in such positive moves, everyone would welcome a retrospective change."
“The elimination of the angel tax will significantly benefit small and medium enterprises (SMEs), emerging brands, startups, and our GetVantage portfolio brands. This decision is expected to attract more investment and create a more favourable environment for innovation and growth in these sectors. Startups will no longer be viewed as an alternative asset class for investments but rather as a mainstream opportunity for every retail investor to participate in and gain high-yield returns by being a part of this growing sector. This change will attract all forms of capital and financing (including equity and quasi-equity) to the segment,” Bhavik Vasa, Co-founder of GetVantage opines.
Understanding Angel Tax
Angel tax refers to the income tax payable on the capital raised by unlisted companies via the issuance of shares through off-market transactions. Introduced in 2012 by then Finance Minister Pranab Mukherjee, it was intended to curb the laundering of funds. The tax is levied on the premium received over the fair market value of shares sold to a foreign investor, categorized as “income from other sources” under Section 56(2) VII B of the Income Tax Act.
Historical Context and Previous Exemptions
Initially, investments by venture capital funds or companies were excluded from this tax. Over the years, the government provided exemptions for certain start-ups recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) and those with share capital (including share premium) below Rs 25 crore. In 2023, further relaxations were extended to government-related investors, banks, and entities in insurance businesses, among others.
