Union Finance Minister Nirmala Sitharaman during a post-Budget press conference in New Delhi on July 23, 2024.
| Photo Credit: ANI
In a major respite for India’s fledgling startups, Union Finance Minister Nirmala Sitharaman, presenting the Union Budget in Parliament on July 23, announced scrapping the contentious Angel Tax on foreign investments received by such enterprises, a development that should ease the financing woes of startups, following what they call a funding winter in the past year.
Follow LIVE updates from The Hindu’s coverage of the Union Budget 2024
Ms. Sitharaman introduced the measure stating that it would help “bolster the Indian start-up ecosystem, boost the entrepreneurial spirit and support innovation”.
The tax was introduced during the UPA government while outlining measures the NDA government took to ease the growth of startups, she said in a press briefing on July 23 afternoon. While answering queries about the possibilities of money laundering due to the abolition, Revenue Secretary Sanjay Malhotra said “there are other provisions in the Income Tax (Act) itself to find out the source of these funds” and that the Prevention of Money Laundering Act (PMLA) continued to be in existence. The existent laws were sufficient to cater to it, Mr. Malhotra added.
“We hope that even some of the past investments which are not already under dispute will probably have a little more benign outlook from the tax department,” Ashish Aggarwal, Vice President & Head of Public Policy at NASSCOM, told The Hindu.
“This new development will lead to a cessation of fresh litigation. Furthermore, funds that would have been tied up in deposits for cases involving notice issuance cease” said Brijesh Damodaran, Partner at Auxano Capital.
The abolition of angel tax assumes significance as it comes at a time when startups funding dropped 60% in 2023 to $10 Billion, according to data in the Indian Tech Startup Funding Report 2023, from Inc42, a private startup media and information platform. The decline is more than 40% in 2022.
The tax was opposed by several industry players as they believed it curbed foreign investment and deterred the growth of startups. Angel tax was originally introduced in 2012 to curb possible money laundering by foreign participants, by investing in overvalued unlisted firms. The unintended consequences were faced by startups, for which investments are made based on the potential value of the business, unlike in regular firms which are valued on their current worth. This imposed tax liabilities in the incubation and early funding stages of startups, deterring their growth.
“This decision is a welcome step towards providing tax certainty, preventing unintended consequences on foreign investments, and supporting startups” said Rahul Charkha, Partner at a legal firm Economic Laws Practice.
Despite opposition from various stakeholders, including the Department for Promotion of Industry and Internal Trade (DPIIT), the government held on to levying angel tax. Moreover, the income tax rules amendments in September 2023 included changes in calculating fair market value of shares and a threshold for considering a share as “overvalued” among others. One of the main intentions of the amendment was to bring in parity between domestic and foreign investors.
