Budget 2024 abolishes angel tax on startups for all classes of investors
New Delhi, July 23, 2024
Decision welcome as 'game changer' for entrepreneurs and companies
Finance Minister Nirmala Sitharaman’s Budget speech on Tuesday announced abolishing the contentious angel tax for all classes of investors, heeding a demand of Indian startups.
Angel tax, officially Section 56(2) (viib) in the Income Tax Act, applies to unlisted companies in India when they raise capital by issuing shares to investors at a price exceeding a company's fair market value. The excess amount is treated as income and taxed at a rate above 30 per cent.
“To bolster the Indian startup ecosystem, boost the entrepreneurial spirit, and support innovation, I propose to abolish the so-called angel tax for all classes of investors,” she said, prompting the investor community to welcome the decision.
Somdutta Singh, a serial entrepreneur and founder and chief executive officer of Assiduus, said the tax's abolition is a “decisive step” for Indian entrepreneurs.
"This will significantly reduce the financial and regulatory burden on startups, encouraging more angel investors to fund innovative ventures. This move will not only boost the flow of capital into early-stage startups but also foster a more supportive environment for entrepreneurs to thrive. By eliminating this hurdle, I believe this is a decisive step towards nurturing India's startup culture that will drive economic growth through innovation," said Singh.
Ninad Karpe, founder and partner at 100X.VC, said: “This is one of the boldest moves made by the Finance Minister. It will be a big boost to the startup world and a game-changer.”
Introduced in 2012, the provision aimed to prevent tax avoidance and fund misuse. It is called angel tax because it significantly affects angel investments in startups.
The provision was initially applicable to local resident investors but its ambit was expanded as part of the government’s anti-tax avoidance move. More than 80,000 startups registered with the Department Promotion of Industry and Internal Trade (DPIIT) did not come under the tax’s purview.
According to investors, angel tax caused “unnecessary scrutiny” of venture capital fund managers by the income tax department, despite market regulator Sebi licensing private transactions.
Ahead of the Budget, DPIIT had recommended removing angel tax.
[The Business Standard]
