Budget 2024: A New Era for Indian Startups as Angel Tax is Abolished

The Union Budget 2024 has rolled out some exciting news for Indian startups and their investors, particularly with the elimination of the long-standing angel tax. This move aims to invigorate the startup ecosystem, encouraging innovation and investment across the country.

During her budget speech, Finance Minister Nirmala Sitharaman highlighted the government’s commitment to fostering entrepreneurship. She said, «To bolster the Indian startup ecosystem, boost the entrepreneurial spirit, and support innovation, I propose to abolish the so-called angel tax for all classes of investors.”

The angel tax was officially known as Section 56(2)(viib) of the Income Tax Act. It applied to unlisted companies when they raised capital by issuing shares above the fair market value, treating the excess amount as income and taxing it at a hefty rate of 30.9 percent. This provision, which has been a significant hurdle for many startups, will no longer affect them after April 1, 2024.

The response from the startup community to this announcement has been overwhelmingly positive. Adarsh Nahata, the Chief Financial Officer of PhonePe, expressed relief at the removal of angel tax, stating, «The abolition of the Angel tax in India is a welcome change that breathes new life into the startup ecosystem. This forward-thinking move by the government eradicates a significant compliance burden, attracting investment, and fostering an environment where startups can truly thrive.”

Siddarth Pai, a Founding Partner of the early-stage venture capital fund 3one4 Capital, echoed similar sentiments. He noted that this is indeed a significant win for investors, eliminating fears associated with angel tax. «Companies raising capital from April 1, 2024, onwards won’t have to suffer the threat of angel tax. The previous extension of the angel tax to foreign investors resulted in a massive drip in funding,» Pai remarked.

The backdrop to these discussions is stark: in 2023, Indian startups experienced a dramatic 72 percent decline in funding, plummeting to a mere $7 billion, down from the previous year’s $25 billion, according to market intelligence platform Tracxn. The removal of angel tax is seen as a vital step to restoring investor confidence and facilitating a more vibrant funding environment.

Furthermore, the budget introduced changes to the long-term capital gains tax rate, lowering it for financial assets to 12.5 percent from the earlier 20 percent. This adjustment aligns rates for both listed and unlisted equity, which has also come as a welcome relief for investors.

Individuals involved in funding and investment activities believe that the new tax regime will foster more funding to Indian startups, which are key players in new asset creation, hiring, and driving sales. «Investing in unlisted companies goes beyond mere financial returns; it contributes tremendously to the economy. Aligning the tax rates recognizes this contribution and encourages more funding to Indian startups,” said Pai.

Also, investing in startups is expected to become easier with the dissolution of angel tax. Anirudh A Damani, Managing Partner at Artha Venture Fund, elaborated on the complexities previously faced by investors, «The requirement for income tax officers to assess valuations led to unnecessary conflicts and delays, involving chartered accountants and tax officials. This change eliminates those complications, making the investment process more seamless.”

The angel tax was initially introduced in 2012 to curb tax avoidance and misuse of funds. However, its repercussions on actual angel investments in startups prompted significant concerns among investors. Over the years, the tax’s applicability expanded, creating a chilling effect on potential investments, especially from foreign players.

In addition to the tax-related reforms, this year’s budget is also focused on the burgeoning space technology sector in India. A significant allocation of Rs 1,000 crore has been proposed to set up a venture capital fund specifically for the space economy. Nirmala Sitharaman stated, «With our continued emphasis on expanding the space economy by five times in the next 10 years, a venture capital fund of Rs 1,000 crore will be established.”

This step signifies the government’s commitment not only to traditional tech startups but also to emerging sectors like space technology, which holds immense potential for growth and innovation in India. The establishment of such a fund can lead to numerous developments in both technology and entrepreneurship.

With the abolition of the angel tax and the rationalization of long-term capital gains tax, many in the startup and investment community believe that the Indian market could see a resurgence in funding and entrepreneurial activities. As they navigate these changes, there’s a renewed sense of optimism about the prospects for innovation and growth in the Indian startup landscape.