The government on Tuesday announced the abolition of angel tax, bringing cheer to the startup industry. The removal of angel tax —a tax levied on funding raised by startups if their valuation exceeds the fair market value — was a long-pending demand of the industry.
The move will give a huge
boost to startups, industry stakeholders said.
“I am thrilled about the abolition of angel tax,” Prashanth Prakash, founding partner at Accel Partners India, told FE.
Prakash further said that
with fewer tax burdens, he anticipates a surge in funding for innovative startups.
“India is home to over 60,000 startups and more than 100 unicorns, and this policy change will drive a wave of new ventures and ideas. In 2024, so far, Indian
startups raised over $7 billion, and this number is set to grow significantly,” he added.
The angel tax was introduced in the 2012 Union Budget by then finance minister Pranab Mukherjee through Section 56(2)(viib) of the Income Tax Act. This was primarily done with the intent to keep a check on money laundering practices through investments in startups.
Venture capitalists and industry experts have, however, been asking for its removal. The industry argued that investors usually fund
startups based on their potential, rather than the current market value, and the tax levied could be as high as 30% of the excess value over the fair market value.
“A tax on capital is antithetical to capital formation and this has long been used to harass startups and investors. Given the mandatory dematting of securities, Section 68, disclosure of unlisted investments in tax returns has plugged the transparency gap for which angel tax was created,” Siddarth Pai, founding partner, 3one4 Capital and co-chair, regulatory affairs committee, IVCA, told FE.
Pai added that although it took 12 years, the startup industry can heave a sigh of relief now.
Anil Joshi, managing partner, Unicorn India Ventures, said: “This will help in expansion of angel investment in India and take away a lot of burden on tax notice for tax paid investment. This will also free up a lot of domestic capital and improve the funding sentiment in a strong way.”
The amendments to the angel tax regime will be effective from April 1, 2025, and will be applicable from assessment year 2025-26, according to the Budget documents.
“The ecosystem will now see explosive growth, moving from a hundred thousand to a million startups in the next five years,” said Saurabh Srivastava, co-founder, Nasscom, TiE and Indian Angel Network.
Another announcement that brought cheer to the industry is the withdrawal of the 2% equalisation levy, which will not be applicable on or after August 1, 2024. “It was a cumbersome, onerous and ramose provision. Its withdrawal is a major boost for the ease of doing business in India,” Pai said.
Eliminating the equalisation levy is expected to alleviate burdens within the digital economy.
“The equalisation levy had been increasing costs for startups, and its removal reduces the double
taxation issue, simplifying the tax burden and allowing startups to focus more on growth rather than navigating complex tax regulations,” Anirudh A Damani, founding partner at Artha Venture Fund, said.
Damani added that this move will make it easier for Indian digital services to be offered internationally without the fear of reciprocal taxation measures.
The equalisation levy was first introduced in 2016 to check tax avoidance by non-resident digital companies providing services to Indian firms.
“However, the interplay between income tax and equalisation levy has been a matter of contention. The potential withdrawal could link to discussions on global tax reforms under OECD (organisation for economic co-operation and development) Pillar 2, aiming to ensure fairness and consistency in taxing corporate profits across borders,” said Anshul Khemuka, partner, Khaitan & Co.