Angel tax withdrawn: FM Sitharaman explains logic behind scrapping decade-old tax

The Narendra Modi government’s decision to scrap angel tax in the state budget was aimed at removing hurdles faced by startups, Finance Minister Nirmala Sitharaman revealed in an interview with The Economic Times on Thursday.“Two years ago, we tried to remove hurdles for startups. A year ago, we said that startups will not be included at all. So every year since 2016, when startups got this push from this government, we tried to remove many hurdles that startups faced and this was one of them,” Sitharaman said, revealing the reasoning behind the move.

The EU Budget 2024 has brought respite to venture capital investors by abolishing the decade-old tax on business angels.

Elaborating on the rationale, Sitharaman said that this was one of the many steps taken by the Centre to help Indian startups grow. However, the move has put those who are waiting to pay their previously due angel taxes in a difficult position.

Sitharaman revealed that the government is working on “sorting it out”. “The revenue secretary said on Wednesday that we will try to sort it out. My approach would be to see how best we can sort it out. Because it cannot be that we have removed the tax but these litigations will be on hold. It cannot be fair. We will have to work something out,” Sitharaman said. The angel tax has been a key talking point among startup industry leaders, who have long argued that it imposes an unjustified financial and compliance burden on young ventures. Experts said the tax has discouraged the growth of genuine venture capital for the fast-growing industry. The tax was first introduced in the 2012 Union Budget by former finance minister Pranab Mukherjee, as part of UPA 2.0, as a move to crack down on money launderers. However, FM Sitharaman said the measures already in place are enough to arrest those laundering money under the guise of businesses.

“We were confident that the PMLA (Prevention of Money Laundering Act) and the Black Money Act would be enough to address the issue, so we simply removed them,” Sitharaman said.

The Manmohan Singh government, while introducing the angel tax, argued that it would help distinguish legitimate startups from those using this channel to funnel money through the system.

Under Modi 3.0, the anti-money laundering strategy has changed.

“What has changed is our drive to remove those elements which were sore points. We have tried to do that. But now there is no other way to make this law, this particular section, free from doubt,” Sitharaman said.

“The provisions of PMLA and Black Money Act, if properly invoked, are more than sufficient and there is no need to insert this section in the Information Technology Act,” she added.