FM Nirmala Sitharaman Announces Abolishment of Angel Tax to Boost India’s Startup Ecosystem
News Mania Desk/Agnibeena Ghosh/24th July 2024
Finance Minister Nirmala Sitharaman, presenting her seventh Union Budget in the Lok Sabha, announced a significant reform by scrapping the angel tax for all investors. This move, welcomed by venture investors as a monumental shift, aims to create a more supportive environment for India’s burgeoning startup ecosystem.
Harsh Bhuta, Partner at Bhuta Shah and Co LLP, highlighted the transformative impact of removing the angel tax. He stated that this decision aligns with the government’s Startup India initiative, reinforcing its commitment to innovation and entrepreneurship while driving economic growth towards the ambitious $5 trillion economy goal. By eliminating a significant funding obstacle, startups can now access investments more freely, which will, in turn, boost job creation and innovation across various sectors.
Bhuta emphasized that simplifying the funding process by removing bureaucratic hurdles will make it easier for startups to secure and scale investments. He anticipates that this change will foster a vibrant startup ecosystem, enhancing both immediate and long-term growth, and significantly contribute to India’s global competitiveness and economic aspirations.
Narinder Wadhwa, Managing Director of SKI Capital, echoed this sentiment, stating that the abolition of the angel tax is a crucial step towards creating a more conducive environment for startup investments and entrepreneurial growth in India. He explained that one of the key issues with the angel tax was that startups often faced challenges in defending their valuations, which are typically based on future potential rather than current financial metrics. Tax authorities would sometimes deem these valuations as inflated, leading to tax demands. By removing this tax, startups will have easier access to funding, allowing them to focus on innovation and scaling their operations, thereby contributing to job creation and economic growth.
Experts have noted that the angel tax created additional burdens and uncertainty for investors, particularly those providing early-stage funding. This deterred potential investments and stifled the growth of startups. The prolonged scrutiny and paperwork to justify valuations diverted startups’ focus from core business activities. Removing the angel tax is expected to significantly reduce the compliance burden and financial strain on startups, making it easier for them to raise early-stage capital. This will likely lead to a surge in new startups and entrepreneurial ventures.
Additionally, the abolition of the angel tax is expected to boost the confidence of both domestic and international angel investors in investing in Indian startups. This could result in an influx of capital, further fostering innovation and growth within the startup ecosystem. Wadhwa noted that the decision addresses long-standing concerns of startups and investors, paving the way for a more vibrant and dynamic entrepreneurial environment. This move aligns with the broader goals of promoting ease of doing business and fostering a culture of innovation in the country.
The angel tax, introduced in 2012 to curb money laundering, unintentionally hindered genuine early-stage investments. The tax considered the difference between the amount received and the fair market value as income, which was then taxed accordingly. Its abolition in Budget 2024 is seen as a landmark decision with profound implications for India’s startup landscape. This reform marks a significant step towards simplifying the investment process and removing barriers that have previously stifled growth in the startup sector.
