Government removes tax burden on business angels from startups

The government took a significant step to support startups by eliminating the “business angel tax” for all categories of investors, which provided a significant boost to the startup ecosystem.

“To strengthen the Indian startup ecosystem, encourage entrepreneurial spirit and support innovation, I propose to abolish the so-called angel tax for all classes of investors,” said the finance minister Nirmala Sitharaman she stated in her budget speech

Angel tax, as described in Section 56.2 VII B, is a 30.6% income tax imposed on unlisted companies when they issue shares to investors at a price above fair market value. According to industry experts, this tax can significantly affect the flow of funds for start-ups, especially in the early stages when they rely heavily on foreign investment.

The Department of Promotion of Investment and Internal Trade (DPIIT) has recommended the abolition of angel tax to the Ministry of Finance, in line with industry requests. Currently, only startups registered with DPIIT are exempt from angel tax, which leaves a significant number of unregistered startups susceptible to the tax. Interestingly, only about 1,34,260 startups are registered, indicating that a significant portion of the startup community remains unregistered.

“Earlier, startups could avail tax exemption from angel tax subject to certain conditions such as the amount of share capital and premium for securities after fund raising not exceeding ₹25 crore, restrictions on the end-use of funds raised by startups such as no investment in financial assets and requirement of filing Form 2 return. The removal of angel tax provisions will now allow startups to raise funds without such conditions and compliance requirements,” according to Anish ShahPartner, M&A Tax and Regulatory Services, BDO India.

The Angel tax was introduced in 2012 to prevent money laundering by limiting the issuance of shares with a value above their market value.

But startups have responded that their valuations, set by investors, reflect future growth potential, not current performance. The industry has disputed the government’s view that a discrepancy between valuations and actual performance indicates illegal activity, emphasizing that investors back startups based on their potential success.

In a recent report, the finance minister also shared the case for scrapping the angel tax, noting that the move is part of the government’s collective efforts to remove obstacles for startups and help them grow.

“Two years ago, we tried to remove hurdles for startups. A year ago, we said that startups would not be included at all. So every year since 2016, when this government gave this push to startups, we have tried to remove many hurdles that they faced and this was one of them,” Sitharaman said. Economic times

The Finance Minister also announced that the government is also working to solve the problems of startups that have not previously paid due taxes to business angels.

“The revenue secretary said on Wednesday that we will try to resolve this. My approach would be to see how best we can resolve this. Because it cannot be that we have removed the tax and these litigations are hanging in the air. It cannot be fair treatment. We will have to work something out,” Sitharaman said.

The angel tax was first introduced in the 2012 Union Budget by former Finance Minister Pranab Mukherjee, under the UPA 2.0 regime, to check money laundering. Nirmala Sitharaman said effective measures are already in place to prevent money laundering.

ⓘ LAFFAZ is not responsible for the content of external sites. Users are required to read and comply with our Terms of Use.