Budget 2024 abolishes 'Angel tax' in India: Why it matters
In a major move for the Indian startup ecosystem, Finance Minister Nirmala Sitharaman has announced the complete abolishment of Angel tax. Previously, unlisted startups faced a tax of 30.9% on investments exceeding the fair market value of their shares. Startups argued that Angel tax created a cash flow burden, deterred investors, and made it difficult to determine fair market value for young companies.
Easier access to angel investment will help businesses
This policy change is seen as a game-changer for Indian startups. Easier access to angel investment will help businesses secure crucial funding during their critical early stages. This can fuel innovation, job creation, and economic growth. In the recent years, funding for startups had taken a hit. This move signals the government's commitment to fostering a thriving startup ecosystem in India.
'Watershed moment in the Indian startup story'
"The announcement of the removal of Angel tax for certain investors is a huge reform. This is essential for startups to remain in India and build form here," said Siddarth Pai, Managing Partner, 3One4 Capital. "While the fineprint as to class of investors is awaited, this is a major step forward for Indian startups. It is a watershed moment in the Indian startup story."
Angel tax: Why it was a concern for startups, investors
The Angel tax regime stipulated that a startup's fundraising could be taxed whenever the funding round occurred at a valuation exceeding the fair value of shares. This led to numerous startups and investors expressing concerns about being hassled by tax authorities even in cases of legitimate investments. In 2019, the government made an exception for DPIIT-registered startups, exempting them from this provision.
Commerce Ministry advocates for angel tax removal
The Commerce Ministry had recommended the abolition of the angel tax, echoing demands from startups. DPIIT Secretary Rajesh Kumar Singh stated earlier this month that while they had provided their inputs, the final decision rested with the Finance Ministry. Angel tax was established in 2012 to deter money laundering through shell companies.
