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.

His party, the Congress, has termed the Budget “nakalchi (copy-paste)”, and Shashi Tharoor, who once ran for the top job in the party, echoed the sentiment and panned it as an “underwhelming” exercise. However, the Thiruvananthapuram MP found a positive too – the abolition of angel tax.

Angel tax refers to the income tax that the government imposes on funding raised by unlisted companies, or startups, if their valuation exceeds the company’s fair market value.

“It is an underwhelming budget. I didn’t hear anything about key issues facing the common man. There is no mention of MNREGA, and insufficient mention of steps taken to improve the income of a common person,” Mr Tharoor told news agency ANI.

The Congress MP said “far too little” was seen in addressing income disparity and added a “token gesture” was made on job creation.

“I welcome only one provision, which is abolishing of tax on angel investors. I had recommended it to Arun Jaitley more than five years ago,” the 68-year-old Congress MP added.

In huge respite to startups, the government on Tuesday announced removal of angel tax for all classes of investors to further promote the growth of entrepreneurs of the country.

“To bolster the Indian startup eco-system, boost the entrepreneurial spirit and support innovation, I propose to abolish the so-called angel tax for all classes of investors,” Nirmala Sitharaman, who was presenting her record seventh budget, said.

While previously the angel tax – a tax levied on capital received on the sale of shares of a startup above the fair market value – applied only to local investors, the Budget for the 2023-24 fiscal year (April 2023 to March 2024) widened its ambit to include foreign investments.

Ahead of the Union Budget, the Department for Promotion of Industry and Internal Trade (DPIIT) had recommended the removal of this levy on startups.

New Delhi:

In a bid to bolster the Indian startup ecosystem, the Centre today announced the abolishment of angel tax for all classes of investors.

Angel tax is levied on the capital raised via the issue of shares by unlisted companies from an Indian investor if the share price of issued shares is seen in excess of the fair market value of the company. The excess realization is considered as income and is taxed accordingly.

“To bolster the Indian startup ecosystem, boost the entrepreneurial spirit, and support innovation, I propose to abolish the so-called angel tax for all classes of investors,” Finance Minister Nirmala Sitharaman said in her Union Budget 2024 speech.

She also announced various changes with respect to tax rates for e-commerce players and certain financial instruments in the context of long-term capital gains.

Long-term gains on financial and non-financial assets will attract a tax rate of 12.5 per cent, she said, while the TDS rate will be reduced to 0.1 per cent from 1 per cent for e-commerce operators.

New Tax Regime Slabs Changed

Finance Minister Nirmala Sitharaman also said the standard deduction in the new tax regime will be increased from Rs 50,000 to Rs 75,000.

She also announced revisions to tax slabs in the new regime in her Budget speech.

The revised slabs are as follows:

• Income up to Rs 3 lakh – Nil
• Rs 3 lakh to Rs 7 lakh – 5 per cent
• Rs 7 lakh to Rs 10 lakh – 10 per cent
• Rs 10 lakh to Rs 12 lakh – 15 per cent
• Rs 12 lakh to Rs 15 lakh – 20 per cent
• Above Rs 15 lakh – 30 per cent

As a result, Ms Sitharaman said, salaried employees can save as much as Rs 17,500 in the new regime. There will be no change in the old tax slabs, she said.