Removal of Angel Tax: A Catalyst for Indian Startup Ecosystem – Rajesh Singla, Founder & CEO , Planify
India’s startup ecosystem has seen remarkable growth over the past decade, positioning the country as a global hub for innovation and entrepreneurship. However, this growth hasn’t come without challenges. One of the most significant hurdles faced by Indian startups was the Angel Tax, a provision that stifled investment and hindered the growth of early-stage companies. With the announcement in Budget 2024 to abolish the Angel Tax for all sets of investors, the Indian startup landscape is poised for a new era of growth, investment, and global competitiveness. It almost took 12 years for the angel tax to be abolished, but now the demon got caught and arrested.
Angel Tax: Overview and History: The Angel Tax was introduced in 2012 as a measure to curb money laundering activities. It was imposed on the excess amount received by a company over the fair market value of its shares. Many startups, particularly in their early stages, rely heavily on angel investments—funds provided by individual investors, typically at the seed or early stages of a startup’s life. However, the Angel Tax created an atmosphere of uncertainty, as tax authorities often questioned the valuation methods used by startups and imposed hefty taxes on the investments received. This not only strained the financial resources of startups but also discouraged potential investors.Let’s look at an example to further illustrate this. If a Startup gets a Rs. 20 crore investment from an angel investor, the investor will receive shares in return. Nevertheless, the combined fair market value (FMV) of the shares issued amounts to Rs 12 crore. The Rs. 8 crore left over is seen as surplus cash and, as a result, subject to a tax rate of 30.9%. The investment amount greater than FMV is categorised as “income from other sources”, and the tax imposed on it is called angel tax.
Government Interventions Over the Years
2016: To encourage the growth of startups, the government exempted startups registered with the Department of Industrial Policy and Promotion (DIPP) from the Angel Tax. However, the thresholds for these exemptions were set too low, making it difficult for many startups to benefit. 2017: As disputes arose over valuations, new rules were established, requiring startups to justify their valuations either based on prescribed rules or to the satisfaction of the Assessing Officer. This created additional challenges for startups in defending their valuations. 2023: The Angel Tax provisions were extended to include funds received from non-resident shareholders, further complicating the process. New valuation methodologies introduced during this time led to additional complications for startups. 2024: In a significant policy shift, the government proposed the abolition of the Angel Tax for all categories of investors in the Budget 2024, removing a major hurdle for startups and paving the way for increased investments and growth in the Indian startup ecosystem. The Abolition of Angel Tax: A Turning Point: In a landmark move, in budget 2024, Hon’ble Finance Minister Nirmala Sitharaman announced the abolition of angel tax provisions for all investor classes. This move provides a much-needed boost to the Indian startup ecosystem. By removing this barrier, the government aims to stimulate investment, foster innovation, and attract global investors.
Key Advantages of this Abolition:1. 1. Relief for Investors: The recent abolition of angel tax is a welcome move. Investors no longer need to worry about tax notices related to their investments. 2. Capital Deployment: Investors can now focus on deploying capital without anxiety about tax implications. 3. Positive Sentiment: Removal of angel tax expects to boost startup funding sentiment and encourage domestic capital inflow. 4. Encouraging Innovation and Growth: Startups will now have the freedom to focus on innovation and scaling their businesses without the constant worry of tax disputes. This is likely to result in a surge in the number and quality of startups, driving the next wave of innovation in India. 5. Attracting Global Investments: The abolition of the Angel Tax aligns with India’s goal of becoming a global hub for startups. By creating a more investor-friendly environment, India is likely to attract more international capital, expertise, and partnerships, further strengthening its position on the global stage.Future Outlook- A Thriving Startup Ecosystem: The scrapping of angel tax will encourage startups to expand and attract fresh investment. This reform aligns with India’s goal of becoming a thriving hub for innovation and entrepreneurship. Investors are likely to view India more favorably, leading to increased funding opportunities. The repeal of angel tax will enhance certainty, encourage startups to grow, and boost fresh capital for startup funding. Venture capital investors predict a trend of reverse flipping—Indian startups relocating their domicile back to India. This landmark reform is a catalyst for India’s goal of becoming a thriving hub for innovation and entrepreneurship.