Startups Return to India Post Angel Tax Abolition

January 11, 2025

The recent abolition of the angel tax in India has sparked a wave of optimism among startups. Many companies are relocating their headquarters back to India, encouraged by government initiatives aimed at improving the ease of doing business. The decision, part of the FY25 Budget, has been instrumental in reversing the trend of startups registering abroad for better tax advantages. The Department for Promotion of Industry and Internal Trade (DPIIT) has reported uptick in the number of startups returning to the country.

About Angel Tax

Angel tax, formally known as Section 56(2)(viib) of the Income Tax Act, was introduced in 2012. It aimed to curb tax avoidance and money laundering by taxing the difference between the fair market value (FMV) of shares and the price at which closely held companies issued them. This provision was often seen as a deterrent for startups, leading many to seek registration in foreign jurisdictions.

Impact of Abolishing Angel Tax

The removal of angel tax has led to a wave of “reverse flipping,” where startups that initially registered abroad are now returning to India. The DPIIT has indicated that this change is positively impacting the equity market. The Ministry of Corporate Affairs is expediting processes to facilitate these transitions, making it easier for startups to operate in India.

Growth of Startups in India

Since the launch of the Startup India initiative in 2016, the number of registered startups has surged to over 157,000 by the end of 2024. In terms of funding, startups received $155 billion in 2024, increase from just $8 billion in 2016. This growth has also led to the creation of over 1.7 million jobs across the country, showcasing the vital role startups play in the Indian economy.

International Collaborations and Opportunities

Countries like Saudi Arabia have shown interest in Indian startups, particularly in events such as the Startup Mahakumbh. The DPIIT is actively pursuing collaborations that allow foreign sovereign pension funds to invest in Indian startups. This strategy aims to create a global network where startups can address international challenges, thereby enhancing their visibility and potential for growth.

Promoting Manufacturing Startups

To boost manufacturing startups, the DPIIT has engaged large companies to identify products they can procure from startups. This initiative seeks to create a symbiotic relationship between established firms and emerging startups, encouraging innovation and economic growth.

The term “reverse flipping” refers to startups returning to India from abroad.
Startup India initiative was launched in 2016 to boost entrepreneurship.
The Centre’s Fund of Funds Scheme (FFS) supports startups with a corpus of Rs 10,000 crore.
DPIIT reported over 1.7 million jobs created by startups as of 2024.
Angel tax was introduced in 2012 to combat tax avoidance through inflated valuations.

Future Meetings with Alternate Investment Funds

Ahead of the ninth anniversary of the Startup India programme, the DPIIT is convening with alternate investment funds (AIFs) to discuss startup funding. The meeting aims to address capital mobilisation and funding opportunities for startups in smaller cities. Approximately 75 AIFs are expected to participate, denoting the growing interest in supporting the startup ecosystem in India. The Centre’s Fund of Funds Scheme (FFS) is a key component of this initiative, providing financial backing to Sebi-registered AIFs, which in turn invest in startups.

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