The Indian startup ecosystem ended its 12-year-long curse of angel tax on Tuesday as Finance Minister Nirmala Sitharaman scrapped the tax in the Union Budget 2024. The tax was introduced in 2012 by the late Pranab Mukherjee, who was the finance minister in the United Progressive Alliance government.
The angel tax is levied on the excess premium that startups receive when they issue high-value shares to angel investors. Over the years, many startups and venture capital investors have been urging the government to scrap the tax.
“One of the key tax proposals announced in this year’s budget is the withdrawal of angel tax levy. This will not only help reset the tax cost matrix for startup investors and foreign strategic investors but also signals a progressive take on tax policy formulation by the government,” says Sumit Singhania, partner, Deloitte India.
Experts say it’s a timely course correction amid the government’s drive to attract long-term strategic investment and risk capital to the country, after Indian startups were starved of capital over the past two winters when investment funds were cut.
Ankur Mittal, co-founder of Inflection Point Ventures, said the move would provide a lot of regulatory clarity.
“The abolition of angel tax will help develop India’s emerging startup ecosystem. It is particularly important at a time when capital crunch is impacting startup liquidity and will facilitate capital flow without tax leakages,” said Ratna Mehta, managing partner at Fundamental Ventures.
The angel tax has always been considered regressive as it is calculated on a nominal basis, but its bite has only grown in the past two years. According to a Tracxn report, investments by Indian venture capital firms peaked at $41.6 billion in 2021, but fell to $25 billion in 2022 after a funding freeze was imposed in May of that year. It is expected to plummet to $7 billion in 2023, forcing many startups to cut staff and other investments.
“The abolition (of angel tax) will enable startup founders to focus on growing their business and raising funds, instead of being subject to some nominal tax after raising an investor round,” said Yagnesh Sangrajika, founder and chief financial officer at 100X.VC.
Anil Joshi, managing partner at Unicorn India Ventures, agreed, saying, “This will definitely help in scaling up angel investing in India and will remove a lot of mental burden from all those who have received tax notices on their tax-paid investments. This will free up a lot of domestic capital and will improve fundraising sentiments significantly.”
The number of down rounds has increased significantly in the last few years, creating extreme volatility for private startups. PharmEasy, Udaan, Sharechat, Meesho etc are some of the unicorns that had to raise funds at lower valuations than their previous rounds.
As startup valuations are highly volatile, scrapping this tax will be beneficial. “This (angel tax) was a burden that hindered distribution of much-needed capital to deserving founders. Removing this dreaded tax will provide a massive boost to startups in the country and allow investors to focus on investing without the anxiety of how they will deal with the repercussions,” says Mayuresh Raut, managing partner at venture capital firm SeaFund.
In addition to removing taxes, the Union Budget has also paved the way for increased investment in startups by slashing LTC tax on unlisted investments. “The increase in LTC tax rate to 12.50% and LTC tax rate to 20% on financial assets may pose challenges for listed investments. But it will be a major benefit for other financial vehicles such as startups and alternative investment funds. The reduction in LTC tax on these investments from 20% to 12.50% will result in significant savings and increased IRR, encouraging growth and innovation,” said Anirudh A. Damani, Managing Partner, Artha Venture Fund.
The finance minister also announced the creation of a Rs 1,000 crore fund for space technology startups and reduced the withholding tax rate for e-commerce businesses to 0.1% from 1%.
Sitharaman also extended support to direct-to-consumer businesses. “E-commerce export hubs will be set up under a public-private partnership model to enable small and medium-sized enterprises and traditional artisans to sell their products in international markets. These hubs will be a one-stop shop for trade and export-related services under a seamless regulatory and logistical framework,” she said.
Katya Naidu is a senior business journalist who writes about stock markets, startups, energy, infrastructure, real estate and healthcare.
