Union Finance Minister Nirmala Sitharaman in her Budget speech on Tuesday announced that angel tax will be abolished for all investors. Top investors in India welcome this move and believe that this will spur investments both domestic and foreign investments and also bolster confidence in the startup ecosystem and among investors.
Siddharth Chandrashekhar, Senior Standing Counsel, Department of Revenue Intelligence and Central Board of Indirect Taxes & Customs highlighted that this abolition is set to supercharge India’s startup ecosystem.
“By eliminating a significant financial and administrative hurdle, it will attract a surge of domestic and foreign investments. This pivotal move, aligning with global best practices, will unleash a wave of innovation and entrepreneurship, essential for robust economic growth and massive job creation,” he said.
However, he also stated that the abolition of the Angel Tax necessitates heightened regulatory vigilance.
Without the tax, there’s a heightened risk of financial malpractices like money laundering disguised as startup investments. The government must enforce rigorous checks to ensure genuine startups benefit and prevent exploitation of the system for illicit activities.Siddharth Chandrashekhar, Senior Standing Counsel, Department of Revenue Intelligence and Central Board of Indirect Taxes & Customs
Vikram Chachra, Founding Partner, 8i Ventures resonating with Siddharth also said that the abolition of angel tax will pool in investments both domestic and foreign.
“By removing this tax, we can expect a more vibrant and dynamic investment landscape, as investors will be more inclined to fund startups without the burden of additional tax implications. This move will not only attract domestic investors but also bolster confidence among foreign investors looking at India as a viable investment destination,” he said.
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The Angel tax was introduced in 2012, intended to curb the use of unaccounted money through the subscription of shares in closely held companies at inflated valuations.
It’s a provision under Section 56(2)(viib) of the Income Tax Act, 1961. It essentially treats the investment received by startups from external investors as “income from other sources” and taxes it at a rate of 30%.
Venture capitalists (VCs) and investors demanded the angel tax to be removed to promote a more conducive environment for startups in India.
Punit Shah, Partner, Dhruva Advisors highlighted that angel tax was supposed to be an anti avoidance provision, to be used only in case of suspected tax avoidance transactions. However, tax authorities used the provision indiscriminately in all cases of share premium amounts infusion.
“This created lot of hardships especially for start ups as the infusion happened at a large valuations which were not accepted by the tax authorities. In most cases the infusion was by PE funds, who are reputed investors and it would be inappropriate to doubt the valuations and add those amounts as income of the companies,” he stated.
Going forward, the companies and the investors will be free to decide commercially justified valuations of the capital and premium infusions, without worrying about the tax implications. This will hugely boost the capital flow into the companies.Punit Shah, Partner, Dhruva Advisors
Sagar Agarvwal, Co-founder and Managing Partner, Beams FinTech Fund also stated that besides bringing a significant relief to the startup ecosystem, this will also encourage more investments.
“This progressive step will undoubtedly encourage more investments, reduce financial burdens, and create a more favorable environment for innovation and entrepreneurship,” he stated.
“The abolition of the angel tax will make it easier for startups to attract investment, allowing them to focus on scaling their operations and bringing innovative solutions to market,” he added.
