Angel Tax Removal - Boon or Bane for Indian Startups?

On 23 July 2024, the Indian Union Budget is scheduled to be published. A crucial issue that has acquired a lot of traction is the abolition of the angel tax. This initiative is aggressively supported by venture capitalists (VCs) and industry professionals, who think it would significantly impact the Indian startup environment.

The Angel Tax: What Is It?

Applicable to unlisted enterprises in India that raise money by selling shares to domestic investors at a price higher than fair market value (FMV), the angel tax is also known as Section 56(2)(viib) of the Income Tax Act. This clause was added to prevent money laundering and the creation of illicit funds by using high valuations as a cover. The tax authorities regard the difference between the investment amount and the FMV as "income" when a startup receives funding at a valuation higher than its FMV. The firm must then pay taxes on this excess amount, which could significantly affect its financial situation.

What are the Arguments for Maintaining the Angel Tax?

The government imposed the angel tax to stop possible money laundering through the inflated values of businesses. Authorities want to ensure that startup financing is legitimate and not used as a front for illegal financial activity, so they are implementing this tax. Some contend that doing away with the tax could promote abuse and exaggerated appraisals. In the absence of this legislation, there is a chance that people will take advantage of the lack of scrutiny to artificially inflate valuations, which will make it easier for black money to flow about. As a result, the angel tax discourages these dishonest activities and encourages integrity and openness in the investing industry.

The government is under increasing pressure as the discussion rages on reevaluating the tax's effects.

The Finance Ministry has already received a recommendation from the Department of Industrial Policy and Promotion (DPIIT) to abolish the angel tax, indicating a rising awareness of the tax's detrimental effects on entrepreneurs. Leading economists and businesspeople have joined the chorus calling for its abolition, claiming it stunts growth and innovation in early-stage firms. Despite these appeals, the Finance Act 2023 suggested that non-resident investors would also be eligible for the angel tax, which caused additional apprehension within the startup community. Concerns have been raised concerning this extension's possible detrimental effects on foreign investments, which are essential to the expansion and viability of Indian startups. The government is under increasing pressure as the discussion rages on reevaluating the tax's effects and finding a middle ground that fosters regulatory supervision and entrepreneurship expansion.

 The Finance Ministry has previously received a recommendation from the Department of Industrial Policy and Promotion (DPIIT) to do away with the angel tax. Prominent economists, businesspeople, and industry insiders agree on removing it, highlighting its detrimental effects on the startup ecosystem. The startup sector was concerned that the Finance Act 2023 would discourage international investment by expanding the angel tax to non-resident investors.

What to expect

The government's final decision regarding the angel tax will be made public on 23 July when the budget is announced. The need for its elimination is growing significantly because startups are essential to India's economy. The decision's outcome will dramatically impact how India's startup ecosystem develops in the future and its capacity to draw in both foreign and domestic capital.

Read More

Indian Government Issues Clarification on Old and New Tax Regime

Personal Income Tax and the Salary Benefits for Working Professionals