The removal of the Angel tax for startups has been a longstanding issue, as this levy was
applied to investments entering the country and such foreign inflows 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 would attract foreign investments, encourage
innovation, and further strengthen the country’s startup ecosystem, which ranks third globally.
“This was an issue of both ease of doing business and taxation. Essentially, it was a tax on
investments rather than income, and investments should not be taxed,” Mr. Singh explained
to PTI.
Providing significant relief to startups, the government announced on July 23 the removal of
the angel tax for all investor categories. This decision is expected to reduce disputes and
litigation, thereby offering tax certainty and policy stability. Additionally, it will lower the
demands involved in assessments and legal battles.
Angel tax, which is an income tax exceeding 30%, refers to the tax imposed on funding
raised by unlisted companies or startups if their valuation surpasses the company’s fair market
value.
Further elaborating, Mr. Singh noted that the tax deterred investors, preventing genuinely
good ideas from receiving support in India, which forced entrepreneurs to seek funding
abroad. “This tax actually reduced foreign direct investment (FDI) into India and created a
situation where people domiciled themselves outside the country, only to return later because
the market is ultimately here,” he added.
Addressing concerns about money laundering in such investments and why an investor would
pay a premium for just a startup idea, Mr. Singh mentioned that these issues can be managed
through other existing legislation. “You are trying to address the 1-2-3% who engage in
money laundering, but burdening 97% of genuine innovators seeking investments,” he said.
The angel tax had pushed startups to seek foreign investors, but with its removal from the
Income Tax Act, emerging entrepreneurs will now be able to raise funds domestically.
Effort to attract investments to Indian startups
Commerce and Industry Minister Piyush Goyal also noted that this decision will help attract
investments in Indian startups and promote the growth of emerging entrepreneurs. The move
is particularly beneficial for sectors like deeptech, artificial intelligence, and clean energy,
which require substantial capital in their early stages.
Section 56(2)(viib) of the Income Tax Act stipulated that the amount raised by a startup
exceeding its fair market value would be considered as income from other sources and taxed
at 30%.
Introduced in 2012 as an anti-abuse measure, this section has been dubbed ‘angel tax’ due to
its impact on investments from angel investors in startup ventures.
Over the years, the government has made several amendments to make this tax regime more
favorable for investors and startups. Under the Finance Act 2023, a change was proposed to
include investments from foreign investors or non-residents within the scope of the angel tax
effective from April 2024.
Certain exemptions notified by the Central Board of Direct Taxes (CBDT) stated that the
provisions do not apply to DPIIT-recognized startups, specific classes of foreign investors,
and entities from 21 countries. Additionally, guidelines on valuation methodologies were also
issued by the CBDT.
However, it was perceived that these provisions were hindering the industry’s overall growth
and the development of the startup ecosystem, particularly inbound investments, an official
commented.
DPIIT Joint Secretary Sanjiv mentioned that numerous representations were received from
stakeholders concerned about the potential negative impact of the angel tax. Before
recommending its removal, DPIIT officials studied various international regimes and
analyzed their approaches.
For investors, this move is expected to boost confidence within India’s investor community
and mitigate risks for investors in early-stage companies, potentially increasing the number of
active investors in India. To date, around 1.44 lakh startups are recognized by the DPIIT.
