The Indian startup ecosystem is buzzing with innovation and ambition. To further fuel this growth, the government offers various incentives, but one term that often sparks debate is "Angel Tax." Finance Minister Nirmala Sitharaman has now proposed to remove the Angel Tax.
Contrary to its name, Angel Tax isn't a tax break. It's a provision under Section 56(2)(viib) of the Income Tax Act, 1961. It essentially treats the investment received by startups from external investors as "income from other sources" and taxes it at a rate of 30%.
How Does it Affect Startups?
Cash Crunch: Young startups, often strapped for funds, might find it challenging to handle the tax burden on top of their operational expenses.
Valuation Hurdles: The tax is levied on any premium paid over the "fair market value" of shares, potentially leading to disagreements on valuation between startups and tax authorities.
Hampers Growth: The additional tax liability can discourage investment, hindering the very innovation and growth the government aims to foster.
Who Does it Impact?
Angel Tax primarily affects:
Startups: Particularly those in early stages that rely heavily on external funding.
Angel Investors: The tax implications can make angel investors more cautious about investing in startups.
The removal of the Angel Tax is now expected to foster a more supportive environment for angel investment which will ultimately benefit the entire startup ecosystem, paving the way for India to become a global innovation hub.
Delphin Varghese - Co-founder and Chief Revenue Officer, AdCounty Media commented, "It really can be seen as a big step in the journey of India's growing startup ecosystem: with the abolition of the 'Angel Tax' on all classes of investors announced by the Finance Minister. The tax issue has been a long-standing and vexing problem for early-stage investments since the year 2012, if not from time immemorial. 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."
Soumyadip Roychoudhury, Tax & Regulatory Partner, MSKB & Associates LLP said, "A member firm of BDO International “The abolishment of Angel Tax for all classes of investors is a major relief for start-ups. This would remove the uncertainty in the space and would also bring in more investments which is an important factor for expansion.”
Samir Sheth, Partner & Head, Deal Advisory Services, BDO India remarked, “This year’s budget has given a great fillip to the start-up ecosystem. The abolition of Angel tax is a great sigh of relief benefitting the start-up industry. The announcement of Rs 1000 cr venture capital fund for the space economy will encourage private participation in the ecosystem thereby enhancing India’s role in the global space economy. While the details are awaited, the FM also mentioned the Government will promote start-ups across the vegetable supply chain to spur growth in the agri-tech sector. Cumulatively these steps should encourage entrepreneurship and the evolution of new start-ups across agri-tech and space economy sectors”
Anish Shah, Partner, M&A Tax and Regulatory Services, BDO India said, “Earlier start-ups were allowed a tax exemption from Angel tax subject to certain conditions such as the amount of share capital and securities premium post fund raise does not exceed Rs 25 crore, the end-use restrictions on funds raised by start-ups such as no investments in financial assets etc., and a requirement to submit declaration in Form 2 to DIPP. The abolition of angel tax provisions will now enable start-ups to raise funds without any such conditions and compliance requirements. This amendment is applicable from AY 25-26”
Vaibhav Kaushik, co-founder & CEO of Nawgati said, "I am elated by the government's decision to abolish the angel tax for all classes of investors. It is what we, and the whole startup community, were looking forward to. This move will now give the Indian startup ecosystem the needed boost, allowing us to attract international funding and expand our reach beyond national borders. The establishment of a Rs 1 lakh crore financing pool for private sector-driven research and innovation is a commendable step, aligning with every startup’s vision for commercial-scale advancements. Additionally, the comprehensive plan to strengthen India's energy security with new policies and initiatives is a promising development for our industry. These steps along with other targeted incentives specifically for startups can play a crucial role in bolstering and sustaining our momentum and driving further innovation in the Indian startup ecosystem."
Neha Singh, co-founder of Tracxn remarked, "The elimination of the Angel Tax will boost confidence among investors in India, particularly at a time when startup funding is declining. According to our report, the Indian startup ecosystem saw a 13% decrease in funding in H1 2024 compared to H1 2023. The removal of the Angel Tax is a strategic step towards positioning India as a global hub for innovation, increasing domestic capital formation, and enhancing the ease of doing business. This initiative creates a favourable environment for innovation and entrepreneurship, showcasing the government's commitment to fostering a vibrant startup ecosystem."
Hariom Seth, Founder, Tagglabs said, "The elimination of Angel Tax is going to infuse new confidence into India's investor community. This comes at a time when global startup funding has and is on a decline. For instance, most Indian startups had a 40% year-on-year slump in their funding in 2023. Now, 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. At the same time, this policy action of India now brings it close on par with global best practices, with regard to the way other nations tax measures in this sector, which may further make foreign players interested in investing in India. This policy change, in the global context, places India at rank three in the initiation of its startup ecosystem and the cementing effect of this position may overthrow the dominance of America and China in the global startup landscape."
"From the Startup ecosystem perspective, Steps like abolishing angel tax will help eliminate a barrier for early-stage investments in startups, encouraging more angel investors to support innovative ventures. Also, lowering corporate tax rates for foreign companies makes India a more attractive destination for foreign direct investment (FDI). This can lead to increased investments in various sectors such as manufacturing, services, infrastructure, etc. Higher investments can spur economic growth, create jobs, and improve overall business environment competitiveness," said Pulak Jain Co-founder, Chief Business Officer, and Head of Strategy, TransBnk.
"The 2024 Budget's abolition of the Angel Tax is set to create a more supportive environment for angel investments, significantly benefiting the entire startup ecosystem. This removal will facilitate startups in raising funds and investing in their growth, thereby fueling job creation," Sandeep Garg, Co-Founder & CEO of Blostem told Business Today.
Ashish Bhatia, Founder & CEO of India Accelerator, co-founder of Finvolve commented, "The removal of the angel tax is a significant milestone for India's startup sector, addressing a challenge that has hindered early-stage investments since 2012. In 2023, startup funding fell to $11.3 billion from $42 billion in FY 2022, highlighting the need for reform. Eliminating the tax, which imposed up to 30% on investments, is expected to boost funding opportunities, rejuvenate investor confidence, and attract more investors. This aligns with the government's vision of a $5 trillion economy by 2025, fostering a vibrant entrepreneurial culture and enhancing global competitiveness."
Rahul Paith, CEO, MATH remarked, "The removal of the Angel Tax is a positive move for the startup ecosystem, as it enhances the investment landscape for emerging technologies like AI and ML. The introduction of a ₹1,000 crore venture capital fund for the space sector, along with the Anusandhan National Research Fund and a ₹1 lakh crore financing pool, underscores the government's commitment to advancing high-impact technologies. However, while these steps are encouraging, the startup community was hoping for additional measures that could further stimulate investments in transformative technologies such as AI and Gen AI. To fully harness these innovations, continued support beyond the India AI Mission will be crucial. We anticipate that future policies will address these needs and bolster the growth of the technology sector."
Ridhima Kansal, Director of Rosemoore commented, Prospects for Angel Tax abolition from the innovation perspective are already causing impetus among job creations through the Indian startup ecosystem. Startups are significant job creators; Indian startups have generated over 750,000 jobs as of 2022. In fact, investment could be eased to bring about a rapid growth of job creation in the context of the 23.2% job seeking among Indians. 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. Currently, such sectors account for roughly 19% of the start-ups that got funded; however, with this policy shift, it is likely to increase. In addition to this, with 44% of Indian start-ups based outside major cities, such a step would further act as a fillip to the growth of innovation hubs in Tier-2 and Tier-3 cities, thus sensibly seeking a balanced development across regions and tapping into the talent pool of India."
Mahankali Srinivas Rao, CEO, T-Hub, "Budget 2024 marks a significant milestone for the Indian startup ecosystem, with initiatives that will undeniably foster innovation and growth. The abolition of the Angel Tax for all classes of investors is a pivotal move that will create a more supportive environment for angel investments, ultimately benefiting startups and paving the way for India to become a global innovation hub. The establishment of a Rs 1,000 crore venture capital fund dedicated to boosting the space sector is another forward-thinking initiative. This substantial investment will propel growth in the space economy by supporting innovative startups and groundbreaking research, positioning India at the forefront of space technology and exploration. At T-Hub, we are excited about these developments and the positive impact they will have on our vibrant startup ecosystem. These initiatives will provide startups with the necessary resources and support to thrive, innovate, and contribute significantly to India's economic growth and technological advancement."
Ankur Mittal, Cofounder, Inflection Point Ventures told Business Today, "While we have to still read the complete change on the abolishment of angel tax but on the face of it, this action has the ability to bring lot of regulatory clarity which generally is appreciated by the investor communities across the world. This should help founders looking to raise capital both in domestic and international markets."
Meanwhile, Sateesh Andra, Founder and Managing Director at Endiya Partners remarked, "Eliminating the angel tax is a significant milestone for India's startup community. This change is anticipated to boost investor confidence and speed up the flow of capital, fueling innovation and growth in our startup ecosystem."
"The removal of the Angel Tax for investors is a significant step that will strengthen the startup ecosystem, encouraging more investments and fostering innovation. This change will significantly improve startup funding sentiment while boosting the morale of deep tech and AI startups to take bigger bets. By focusing on skilling and employment, the budget creates a favourable environment for tech companies to thrive. I am enthusiastic about these initiatives and look forward to contributing to India's journey toward becoming a global tech leader," Jaspreet Bindra, Founder, Tech Whisperer told Business Today.
Raghunandan Saraf, Founder & CEO of Saraf Furniture said, "The removal of Angel Tax represents a strategic move in taking India towards positioning as a global hub for innovation. According to officials, the move is in line with India's ambitious target of becoming a $10 trillion economy by 2030, wherein startups are expected to play a very crucial role. That may grow manifold the current worth of the Indian startup ecosystem, projected to touch $3 trillion. This brings an autonomy that, through a multiplier effect on the economy, would make it possible to increase the present 9-10% share of GDP that startups account for. It would also boost India's position in the global innovation index; presently, it occupies the 40th slot. 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."