What is Angel Tax? – Current Updates (July, 2024)

July 11, 2024

The Department for Promotion of Industry and Internal Trade (DPIIT) has suggested that the unpopular “angel tax” on startups should be gotten rid of. This could be announced in the Union Budget. The DPIIT secretary stated that a proposal to get rid of the tax has been made. The goal is to make it easier for startups to get funding and make them more appealing to investors.

Understanding Angel Tax

Angel tax is a tax that private companies have to pay on raised money that is more than their fair market value. It mostly affects payments from angel investors, which is how the name came about. Section 56(2) VII B of the Income Tax Act put this tax in place. It says that any premium on selling shares to foreign buyers is “income from other sources,” which means it needs to be taxed.

Origins of Angel Tax

The angel tax was included in the 2012 Union Budget by Pranab Mukherjee, who was Finance Minister at the time. Its goal was to stop people from moving money. In April 2018, a big change was made: startups didn’t have to pay this tax if the total investment, including funds from angel investors, didn’t go over 10 crore. However, they still had to get more licenses and valuation certificates.

Rationale Behind DPIIT’s Recommendation for Repeal

This suggestion came from talking with people in the startup environment and industry groups that were constantly worried about how the angel tax would hurt startup funding and growth. The DPIIT has told the finance ministry about these worries and suggested that getting rid of it could help capital formation in the country a lot.

Impact on Startups

Getting rid of the angel tax could greatly help India’s over 141,000 DPIIT-registered startups. It would also make angel investments more attractive and smart financially. Angel tax is currently seen as a turnoff by possible investors because it lowers the amount of money that can be used to grow and reinvest in startups. The Confederation of Indian Industry (CII) and other business groups have been vocal supporters of lowering this tax to help the startup environment.

Current Investment Trends and Challenges

A small drop in startup fundraising efforts was seen in the first half of 2024, which shows that the economy is tough for new tech startups. Also, big drops in the values of well-known startups are a sign of a wider slowdown in funding, which is made worse by investors’ careful views on the world’s markets. Getting rid of the angel tax might help with some of these problems by promoting more robust business activities.

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