Budget 2024: DPIIT wants angel tax, inverted duty to be removed this time

Union Budget 2024: The Department for Promotion of Industry and Internal Trade (DPIIT) has asked for the removal of the contentious Angel Tax for startups. DPIIT Secretary Rajesh Kumar Singh on Thursday said that the department has proposed phasing out of the inverted duty structure and high tariff on inputs in sectors such as electronics.

Angel tax, also referred to as Section 56(2) VII B of the Income Tax Act, is imposed on unlisted companies in India when they raise capital through share issuance to domestic investors at a price exceeding the fair market value of the company. The surplus amount is treated as income and subject to taxation at a rate above 30%. This provision was implemented in 2012 as a preventative measure against tax avoidance and misuse of funds.

The Finance Act 2023 proposed to extend Angel Tax even to non-resident investors from April 1, 2024.

Industry has sought the removal of Section 56(2)(viib) stating that the step “would greatly aid capital formation in the country”.

“Based on consultations with the startup ecosystem we had, we have recommended that in the past as well, we have recommended this time also,” Singh said.

Industry sources said during the early phases of operation, numerous startups rely significantly on foreign investments. The introduction of an angel tax could impede the fund influx, particularly in times of financial strain.

It is worth noting that startups enlisted with DPIIT are set to be granted an exemption from this tax. However, there exist merely approximately 1,34,260 startups that are officially registered, leaving a substantial number unregistered.

Furthermore, the government is contemplating the rationalization of visa regulations for enterprises operating within the 14 sectors covered by the PLI scheme.

“This will include all companies investing in all 14 sectors, whether or not they are covered under the PLI scheme,” Singh said.

Last week, Mohandas Pai, chairman of Aarin Capital and former Infosys CFO, also demanded the removal of Angel Tax, calling it the biggest barrier to ease of doing business for startups. 

"Startups are fed up of this threat. They are harassed by the IT department, with cases piling up and not getting resolved. Please, please repeal that law," Pai said, reflecting the frustration of many in the startup community.

Even the Confederation of Indian Industry (CII) recently recommended the removal of the tax in its Union Budget submission. 

The CII stated that eliminating this tax would significantly boost capital formation in the country. Nasscom, which represents India’s technology industry, has also highlighted several issues with the Angel Tax in its pre-budget memorandum for 2024-25. Nasscom pointed out that the tax officers have the authority to disregard valuations done by professional valuers, making the tax landscape for startups highly subjective and unpredictable.