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The potential removal of the contentious angel tax for startups might be included in the upcoming Union Budget announcement, following recommendations from the Department for Promotion of Industry and Internal Trade (DPIIT). DPIIT secretary Rajesh Kumar Singh recently confirmed that the department has proposed eliminating the angel tax, which refers to income tax imposed on funding raised by unlisted companies or startups if their valuation exceeds the fair market value. This tax predominantly affects angel investments, hence its name.
Initially introduced in the 2012 Union Budget by then Finance Minister Pranab Mukherjee under the UPA-II regime to curb fund laundering, the tax has been a point of contention. In April 2018, the government issued a notification providing exemptions under Section 56 of the Income Tax Act for startups where total investments, including from angel investors, did not exceed Rs 10 crore. However, to qualify for this exemption, startups needed approval from an inter-ministerial board and a valuation certificate from a merchant banker.
The DPIIT's recommendation to remove the angel tax stems from consultations with the startup ecosystem, aiming to boost capital formation in the country. The final decision rests with the finance ministry, which has received written inputs from industry associations advocating for the tax's removal. Over 1,41,000 DPIIT-registered startups in India stand to benefit significantly from this potential repeal, as they argue that high tax rates deter angel investors, reducing their access to necessary funding.
The Confederation of Indian Industry (CII) and various startup stakeholders have long pushed for the rationalization or removal of the angel tax, citing its adverse impact on startup growth and innovation. Should the tax be repealed, it would be seen as a positive step towards fostering a more conducive environment for startup investment and development in India.
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