Eliminating the Angel Tax: A Significant Advantage for Indian Startups

New Delhi, Jul 24 (PTI) - The removal of the angel tax for startups, a long-pending issue, is a significant step as this tax was levied on investments entering the country and should not be taxed, according to a senior government official. Rajesh Kumar Singh, Secretary of the Department for Promotion of Industry and Internal Trade (DPIIT), stated that this decision will attract foreign investments, promote innovation, and strengthen India's startup ecosystem, the third-largest in the world.

"This was both a business ease issue and a tax issue. Essentially, it was a tax on investments, not income, and investments shouldn't be taxed," Singh told PTI.

On Tuesday, the government announced the removal of the angel tax for all investor categories, offering substantial relief to startups. The angel tax, a 30% income tax, was imposed on funding raised by unlisted companies or startups if their valuation exceeded the company's fair market value. This decision aims to reduce disputes and litigation, providing tax certainty and policy stability, and lowering assessment and litigation demands.

Singh further explained that investors support potential new innovations, and this tax was discouraging them. The tax prevented "genuinely good" ideas from getting funded in India, forcing entrepreneurs to seek investments abroad, reducing foreign direct investment (FDI) into India, and causing innovators to domicile outside the country.

Addressing concerns about money laundering in such investments and why investors pay a premium for a startup idea, Singh noted that these issues could be managed through existing legislation. "You are targeting a small percentage of people involved in money laundering while burdening the vast majority of genuine innovators seeking investment," he said.

With the removal of the angel tax, startups will no longer need to seek foreign investors, making it easier for budding entrepreneurs to raise funds. Commerce and Industry Minister Piyush Goyal also noted that this decision would attract investments in Indian startups and promote the growth of new entrepreneurs.

The move is expected to benefit emerging sectors like deeptech, artificial intelligence, and clean energy, which require significant early-stage capital. Section 56(2)(viib) of the Income Tax Act, which deemed the amount raised by a startup exceeding its fair market value as income from other sources and taxed it at 30%, has now been amended. Introduced in 2012 as an anti-abuse measure, this section has impacted investments from angel investors in startups.

Previous amendments have made the tax regime more conducive for investors and startups, including changes under the Finance Act 2023 to include investments from foreign investors or non-residents within the angel tax scope, effective April 2024. The Central Board of Direct Taxes (CBDT) had also notified exemptions for DPIIT-recognized startups, certain foreign investors, and entities from 21 countries.

However, the provisions were seen as hindering the industry's growth, particularly inbound investments. Joint Secretary in the DPIIT, Sanjiv, said that the department received multiple representations from stakeholders about the potential adverse impact of the angel tax. Before recommending its removal, DPIIT officials analyzed various international regimes and their approaches.

This move is expected to boost confidence among India's investor community, reduce risk for early-stage investors, and increase the number of active investors in the country. Currently, about 1.44 lakh startups are recognized by the DPIIT.