Finance Minister Nirmala Sitharaman on Tuesday proposed to abolish angel tax for investors in the Union Budget for 2024-25, addressing a long-pending demand from startups and their backers.
“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,” Sitharaman said in her budget speech in parliament.
Angel tax is a tax imposed when shares of an unlisted entity are issued to an investor at a price exceeding their fair market value. It has been a point of contention within the startup community for nearly a decade.
Previously, this tax was levied solely on Indian resident investors. However, starting April 1, 2024, it was set to be extended to non-resident investors as well.
The announcement to abolish this tax is seen as a significant move to give a boost to the startup ecosystem and attract more investments.
Introduced in 2012, the angel tax aimed to curb the use of unaccounted money through inflated share valuations in closely held companies. However, venture capitalists and industry experts have long called for its removal to create a more supportive environment for startups in India.
Angel tax is a provision under Section 56(2)(viib) of the Income Tax Act, 1961, which treats investments received by startups from external investors as "income from other sources" and taxes them at a rate of 30%.
The removal of angel tax is expected to improve the ease of doing business in India, promote innovation, and support the growth of new enterprises, say angel investment platforms and startup founders alike.
“This will bring a huge impetus to the growth of our startups," said Padmaja Ruparel, co-founder, IAN Group.
“Abolishing of angel tax for investors is an excellent move to remove the ambiguity around fundraising for growing organizations who have no support from banks and are heavily reliant on this source,” said Amit Prasad, founder and chief executive officer of Peak XV Partners-backed SatNav Technologies.
Aditya Sarda, senior vice president, investments at BlackSoil, said that while the tax's genesis was to prevent money laundering in certain cases, it had morphed into a more significant issue for the startup ecosystem. "Genuine startups 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," he said.
