Explained | What is Angel Tax?
Angel tax has emerged as a contentious issue within India’s booming start-up ecosystem. It’s a term that finds its roots in the policies directed at early-stage funding, specifically the income tax levied by the government on the capital raised by unlisted companies or startups when their valuation is deemed to exceed the fair market value of the company. But what does this really mean, and why is it a matter of concern? Let’s delve deeper.
Understanding Angel Tax
Angel tax directly affects angel investors—those who provide capital for startup ventures at their nascent stages. The rationale behind its implementation was to prevent money laundering activities under the guise of transactions in shares of unlisted companies. The term “Angel Tax” came into the lexicon following its introduction in the 2012 Union Budget by then Finance Minister Pranab Mukherjee. It was a move aimed at curtailing the misuse of funds, but it also inadvertently impacted genuine investments in startups.
In an attempt to soften the blow to start-ups, the NDA government, in 2018, issued a notification under Section 56 of the Income Tax Act. This notification was a beacon of hope as it exempted startups from this tax, provided the total investment, including funding from angel investors, did not exceed Rs 10 crore. Moreover, startups were mandated to seek approval from an inter-ministerial board and also obtain a certificate from a merchant banker to avail of the exemption, creating a regulatory hurdle that many found cumbersome.
The DPIIT’s Stand Against Angel Tax
The Department for Promotion of Industry and Internal Trade (DPIIT) has stepped into the conversation, advocating for the complete removal of angel tax. This development comes after engaging with various stakeholders within the startup ecosystem who have voiced their concerns over the stifling impact of this tax on early-stage innovation and funding. DPIIT Secretary Rajesh Kumar Singh, in a statement on July 4, underlined the department’s stance. He revealed that DPIIT has recommended the abolition of angel tax in the upcoming 2024-25 budget, which is to be presented by Finance Minister Nirmala Sitharaman. This move is seen as a significant stride towards fostering a conducive environment for startups, aiming to streamline their growth and reducing bureaucratic hindrances that currently overshadow their potential for innovation and job creation.
Why is the Removal of Angel Tax Significant?
Angel tax has been a barrier for many startups looking to secure funding in their critical early stages. The tax’s presence implied that startups not only had to worry about the viability and scalability of their business model but also navigate through an additional layer of financial and regulatory compliance. The DPIIT’s recommendation to abolish the tax is a nod to the indispensable role startups play in the economy—driving innovation, creating jobs, and contributing significantly to the GDP.
Removing angel tax would directly benefit the entrepreneurial ecosystem, encouraging more investments, and ensuring those funds are channeled towards innovation rather than compliance. It’s a step that could potentially reignite the Indian startup scene, making it more attractive to both domestic and international investors.
Conclusion
The proposed removal of angel tax is a breath of fresh air for startups and investors alike. It represents a broader shift towards acknowledging and addressing the hurdles faced by startups in accessing funding. By simplifying the process and removing punitive measures like the angel tax, the government signals its commitment to fostering an environment where startups can thrive. As we move towards the next financial year, the industry awaits this potential change, hopeful for a new chapter in India’s startup narrative—one marked by innovation, growth, and an influx of global investment.
