In a groundbreaking move, Finance Minister Nirmala Sitharaman unveiled the Union Budget 2024, bringing forth a significant development for investors in the form of the official abolition of the “Angel tax” for the financial year 2024-25. This momentous decision is set to have a profound impact on the startup landscape, creating a more nurturing and favorable environment to foster their growth and advancement
During her Budget speech, Sitharaman also announced several changes regarding tax rates applicable to e-commerce players and certain financial instruments, particularly in relation to long-term capital gains. Emphasizing the importance of nurturing the Indian startup ecosystem, promoting entrepreneurial spirit, and supporting innovation, she stated, “To bolster the Indian startup eco-system, boost the entrepreneurial spirit and support innovation, I propose to abolish the so-called angel tax for all classes of investors.”
The angel tax, which had been a concern for startups and investors, imposed a tax on the excess premium paid by investors while investing in startups. Its removal is expected to alleviate the financial burden on startups and encourage more investment in the sector.
The decision to abolish the angel tax that was imposed in 2012 by the then Finance Minister P Chidambaram marks a major milestone and is poised to have a transformative impact on startups across the country. Long burdened by this tax, which imposed additional costs on investors during the funding process, startups can now look forward to a more favorable and supportive environment. By removing this tax, the government seeks to alleviate financial pressures on startups and create an atmosphere that encourages their growth and development.
The primary objective behind Angel Tax was to detect money laundering practices and curb the proliferation of bogus startups. By considering investments received by unlisted startups from external investors as taxable income, the government aimed to ensure transparency and accountability in the startup ecosystem.
Nevertheless, certain key issues emerged with the Angel Tax. One concern was its impact on the valuation of shares. The tax imposed on the premium above the fair market value of shares created complexities in determining the actual value of startups. Another issue was the treatment of estimated figures in the discounted cash flow (DCF) method, which raised questions about the accuracy of the tax calculations.
Additionally, the scrutiny of funding sources and investor credibility added another layer of complexity for startups. The retrospective application of the tax and its implications on the conversion of convertible instruments into equity also became points of dispute among stakeholders.
Industry hails abolition of Angel Tax
The notification for the abolition of the angel tax was issued in 2018, stated that startups would be exempted if their total investment, including funding from angel investors, does not exceed Rs 10 crore. This move came as a relief to startup leaders, industry analysts, and investors who had long advocated for the scrapping of the angel tax, particularly due to the reliance of many young startups on foreign investors.
With over 1.17 lakh startups currently registered with the government and eligible for incentives under the Startup India initiative, this exemption holds great significance. Startups play a crucial role in fostering innovation, job creation, and economic growth, and the removal of the angel tax is expected to provide a much-needed boost to their operations.
Among those commenting on the announcement, Sumit Singhania, Partner at Deloitte India, highlighted the positive implications of this decision. He stated that it will not only reset the tax cost matrix for investors in startups but also benefit foreign strategic investors. Singhania further emphasised that this move reflects a progressive approach to tax policy making by the government. The withdrawal of the angel tax, which has caused concern since its introduction in 2012, signifies a timely course correction. It signifies the government’s commitment to facilitating long-term strategic investments and promoting innovation and research and development through the availability of more risk capital.
The removal of the angel tax has been met with enthusiasm by industry experts. Lokesh Shah, Partner at IndusLaw, described it as a “huge relief” for Indian companies, particularly startups. The Department for Promotion of Industry and Internal Trade (DPIIT) has also recommended the removal of this levy on startups ahead of the Union Budget.
