Finance Minister Nirmala Sitharaman on Tuesday brought cheer for start-ups as she abolished angel tax in the Union Budget 2024-25 for all classes of investors.
She also said that the corporate tax rate on foreign companies will be reduced to 35 per cent.
WHAT IS ANGEL TAX?
Angel Tax is used to refer to the income tax payable on the capital raised by unlisted companies via the issue of shares through off-market transactions.
Under Section 56(2) VII B of the Income Tax Act, the premium received on the sale of shares to a foreign investor is considered “income from other sources” and therefore, taxed accordingly.
It was in 2012 that the tax was first introduced by then finance minister Pranab Mukherjee under the UPA-II regime to check the laundering of funds.
In April 2018, the government issued a notification to give exemption to start-ups under Section 56 of the Income Tax Act in cases where the total investment including funding from angel investors did not exceed Rs 10 crore.
For the exemption, start-ups were also required to get approval from an inter-ministerial board and a certificate of valuation from a merchant banker, Economic Times reported.
When introduced, investments by a venture capital fund or company in a venture capital undertaking were kept outside the ambit of angel tax. Thereafter, the government provided relaxation to certain start-ups as recognised by Department for Promotion of Industry and Internal Trade (DPIIT) and having share capital (inclusive of share premium) lower than Rs 25 crore, pursuant to new issue.
In 2023, the government provided further relaxations to investors including government and government related investors, banks, entities in insurance business and certain categories of investors based in 21 jurisdictions as notified by it.
WHO DOES IT IMPACT?
Apart from start-ups, particularly those in early stages that rely heavily on external funding, the tax affects angel investors as the implications may make them more prudent about putting their money in start-ups.
WHY WAS THE INDUSTRY AGAINST IT?
For start-ups that are fledgling, the angel tax was an impediment as raising money often became an issue. The industry was also against angel tax as it was levied on any premium paid over the “fair market value” of shares, potentially leading to disagreements on valuation between startups and tax authorities.
INDUSTRY REACTION TO ANGEL TAX BEING ABOLISHED
Delphin Varghese, co-founder and Chief Revenue Officer, AdCounty Media, called the move a “big step in the journey of India’s growing startup ecosystem”.
“The tax issue has been a long-standing and vexing problem for early-stage investments since the year 2012, if not from time immemorial. The Angel Tax, levying up to 30.9% on investments far exceeding the fair market value, had stopped a lot of potential big investors. The decision could boost the funding of startups in their early stages, although, at this point in time, India already houses upwards of 84,000, with 107 of them having reached unicorn status, according to official records,” he said.
“Indian startups raised $42 billion in FY-2022 through 1,584 deals, a quantum which can potentially skyrocket if not hemmed in by this tax barrier. Lastly, abolishing the tax is expected to be in alignment with the spirit of the government’s Startup India initiative, which could give India better momentum in its journey toward becoming a $5 trillion economy by fostering both innovation and entrepreneurship in various sectors.”
Siddharth Maurya, Founder & Managing Director of Vibhavangal Anukulakara Private Limited, said scrapping of the Angel Tax would infuse new confidence in India’s investor community. “Getting rid of this tax impediment should mean a pretty big trophy of risk taken out for investors in very early-stage companies, unlocking potentially billions in dormant capital. This number of active investors in India could now increase sharply, to 6,000-7,000.”
Meanwhile, Ridhima Kansal, director of Rosemoore, said start-ups were significant job creators and the big policy shift is likely to benefit emerging sectors like Deeptech, AI, and Clean Energy, amongst others, which take a large amount of capital at an early stage.
Raghunandan Saraf, Founder & CEO of Saraf Furniture, said the move would take India “towards positioning as a global hub for innovation”. “This would encourage a more risk capital–friendly milieu and, therefore, more likely home-grown global tech giants, besides reducing technology dependence and boosting economic sovereignty in the long run.”
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