Know about Angel Tax – Current Update (July 2024)

The Department for Promotion of Industry and Internal Trade (DPIIT) has suggested that the unpopular “angel tax” on startups should be abolished. It may be announced in the Union Budget. The DPIIT secretary said that a proposal has been made to abolish the tax. Its goal is to make it easier for startups to get financing and make them more attractive to investors.

Understanding Angel Tax

Angel tax is a tax that private companies have to pay on funds raised in excess of their fair market value. It mainly affects payments to angel investors, which is where the name comes from. Section 56(2) VII B of the Income Tax Act established this tax. It states that any premium received from selling shares to foreign buyers is “income from other sources”, which means you have to pay tax.

Origin of Angel Tax

Angel tax was included in the 2012 Union Budget by Pranab Mukherjee, who was the finance minister at the time. His goal was to prevent people from moving money. In April 2018, a major change was made: startups would not have to pay this tax if the total investment, including angel investors’ funds, did not exceed Rs 10 million. However, they still had to obtain more licenses and assessment certificates.

Rationale for DPIIT recommendation to repeal

The suggestion came from talking to people in the startup ecosystem and industry groups who were constantly concerned about how angel tax would hurt startup funding and growth. DPIIT conveyed these concerns to the Finance Ministry and suggested that getting rid of it could significantly help capital formation in the country.

Impact on startups

Getting rid of angel tax could significantly help India’s more than 141,000 startups registered with DPIIT. It would also make angel investing more attractive and financially smart. Currently, potential investors consider angel tax a turnoff because it reduces the amount of money that can be used to grow and reinvest new companies. The Confederation of Indian Industry (CII) and other business groups have openly supported reducing this tax to help the startup environment.

Current Investment Trends and Challenges

The first half of 2024 saw a slight decline in fundraising efforts for startups, which suggests that the economy remains tough for tech startups. Furthermore, the large drop in the values ​​of well-known startups is indicative of a broader slowdown in funding, further exacerbated by investors’ cautious views on global markets. Getting rid of the angel tax could help address some of these problems by promoting more robust business activity.

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