End of angel tax brings relief to Indian startups | Fusion - WeRIndia

While presenting the Union Budget, Finance Minister Nirmala Sitharaman announced the scrapping of the angel tax. This move delighted startups and investors alike.

Here’s a look at the origins of this tax, its impact, and what its removal means for the startup ecosystem.

The angel tax was introduced in the 2012 Union Budget by then Finance Minister Pranab Mukherjee.

The objective was to prevent money laundering through startup investments. It also intends to catch bogus firms engaging in such practices.

Angel Tax, under Section 56 (2) (vii b) of the Income Tax Act, was imposed on funds raised by startups from angel investors that exceeded the fair market value of the company.

For example, if a startup’s fair value was ₹1 crore and raised ₹1.5 crore, then the excess ₹50 lahks was taxed at around 31 per cent.

Angel investors are high-net-worth individuals. They invest their personal income in startups or small to medium-sized companies, unlike traditional venture capitalists or institutional investors.

Startups argued that determining a fair market value is impractical and often unfair. Tax authorities preferred the discounted cash flow method, which startups felt favoured the tax authorities.

Many startups received tax notices for investments made years prior, with taxes and late fees sometimes exceeding the initial investment.

A survey revealed that over 73 per cent of startups that raised capital between ₹50 lakh to ₹2 crore had received angel tax notices in 2019. This caused significant distress within the startup community.

Initially, the angel tax applied only to domestic investors. Last year, it was extended to include foreign investments, further complicating the investment landscape for startups.

In the 2019 Union Budget, the government provided some relief by exempting DPIIT-registered startups from angel tax. However, this exemption was not universal.

Only those certified by the Inter-Ministerial Board (IMB), a group of bureaucrats assessing a startup’s innovation and eligibility for tax benefits, were exempt. Less than 1 per cent of the 84,000 DPIIT-registered startups are IMB-certified.

Now, the finance minister announced the scrapping of the tax. The removal of the angel tax is expected to significantly boost the Indian startup ecosystem by making it easier to raise funds without the fear of hefty tax liabilities.

This move is seen as a positive step towards fostering innovation and entrepreneurship in India.

Image from Pxhere (Free for commercial use / CC0 Public Domain)

Image Published on February 20, 2017

Image Reference: https://pxhere.com/en/photo/764778