Budget’ 24: Startup ecosystem all smiles with scrapping of angel tax

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In the latest budget, there were several important announcements, including the abolition of angel tax. Finance Minister Nirmala Sitharaman said that the government will do away with angel tax for all types of investors. This decision has brought relief to startups.

Startups had been consistently complaining about this tax. They argued that they were already struggling with funding issues, and angel tax was making it harder for them to raise capital.

Let’s understand more about angel tax. When was this tax introduced? How was it applied and how its abolition will benefit startups?

What is Angel Tax?

Angel tax is essentially an income tax imposed on funding raised by an unlisted company. This tax is levied when a company issues its shares at a price higher than their fair market value to an investor.

In simple terms, when a startup raises funds from an angel investor, they had to pay tax on that funding as well. This entire process used to fall under Section 56 (2) (vii) (b) of the Income Tax Act, 1961.

Angel investors are large investors who invest in early-stage startups.

Angel tax was first introduced in 2012. At that time, India’s startup ecosystem was in its early stages. The purpose of this tax was to prevent money laundering. Nearly a decade later, an announcement in Budget 2023 made to bring investments from foreign sources also under this tax.

While the government started this tax with good intentions, startups were suffering heavy losses. That is why, this tax was conflicting for many years.

But now, in budget 2024, Finance Minister has announced the abolition of this tax. She said that to boost entrepreneurship and support innovation in India’s startup ecosystem, this tax will be abolished for all investors.

However, after the budget, when the Finance Minister spoke to the media, she also addressed questions about money laundering and angel tax. She said that angel tax was primarily a provision of tax and not a system to prevent money laundering.

Better days ahead for startups

With the abolition of angel tax, startups and the corporate world are happy. The industry has welcomed this step of the government. In a statement, FICCI Cement Committee member Gajendra Pratap Singh said it was a positive step and that it should have been got ridden much earlier.

In a special conversation with Money9, he said that “9 out of 10 startups fail. They need a lot of support. Everything is not right in the early stages. So this was the right time to abolish angel tax…”

While asked to count the benefits of abolishing this tax, startups started opposing it. They say that it was creating obstacles in innovation and funding, which is not the case anymore. Now innovation will get a boost and burden of tax on startups will decrease. Overall, this will encourage the startup ecosystem in the country and provide a better support system.