Budget 2024: In a major step, the Union Budget 2024 presented by Finance Minister Nirmala Sitharaman on Tuesday officially abolished the "Angel tax" for all classes of investors for the financial year 2024-25. The removal of the angel tax is anticipated to significantly benefit startups by fostering a more supportive and conducive environment for their growth and development.
In her Budget 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. "First of all, 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," she said.
What is Angel Tax?
Angel Tax is a provision under Section 56(2)(viib) of the Income Tax Act, 1961. It sees the investment received by unlisted startups from external investors as "income from other sources" and taxes it at a rate of 30 per cent. This causes a burden for young startups, who are already cash-strapped and find it challenging to handle this specific tax burden.
As per the law, if an Indian unlisted company receives an excess investment on the sale of shares to a foreign investor, it will be taxed at the rate of 30 per cent. It was introduced in 2012 by the UPA government under former PM Manmohan Singh to detect money laundering practices and bogus startups.
In 2018, the government issued a notification to give exemption to startups under the relevant section of the Income Tax Act, in cases where the total investment including funding from angel investors did not exceed Rs 10 crore. Startup leaders, industry analysts and investors have long called for scrapping the angel tax, since many young startups are reliant on foreign investors.
Reactions to abolition of Angel Tax
Taking to X, Congress leader P Chidambaram wrote, "I was pleased to hear that the FM will abolish the Angel Tax. Congress has pleaded for the abolition for many years and most recently in the Congress Manifesto on page 31."
Commenting on the announcement, Deloitte India Partner Sumit Singhania said it is a positive move as it would help reset not only the tax cost matrix for investors in startup, but for foreign strategic investors as well. "It also puts out a progressive view of tax policy making by the government. Since this levy has stung for more than a decade since it was introduced in 2012, the withdrawal of angel tax entirely means a timely course correction as the government rolls out the red carpet for long-term strategic investment as well as more risk-capital to promote innovation and R&D," he said.
Lokesh Shah, Partner, IndusLaw, termed it as a "huge relief" for Indian companies, particularly startups. Ahead of the Union Budget, the Department for Promotion of Industry and Internal Trade (DPIIT) has recommended the removal of this levy on startups. Notably, over 1.17 lakh startups are registered with the government and are eligible for availing of incentives under the government's Startup India initiative.
(with agency inputs)
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