Startups breathe sigh of relief as angel tax is abolished

A long-standing demand from Indian startup investors to abolish the Angel Tax has been met in Budget 2024. The Indian startup community has overwhelmingly welcomed the much-awaited move. In her speech Finance Minister Nirmala Sitaraman said “First of all, to bolster the Indian start-up ecosystem, boost the entrepreneurial spirit and support innovation, I propose to abolish the so-called angel tax for all classes of investors”.

Saurabh Srivastava, Co-founder of NASSCOM, TiE and Indian Angel Network recalled how he was part of a Government Committee on Creating a Vibrant Entrepreneurial Ecosystem when, paradoxically, the Angel Tax was introduced in 2012. Since then IAN has worked tirelessly to have this tax revoked, along with others. "I have lost count of the number of meetings at all levels of government that Padmaja and I have done over the years, the various recommendations put forward etc. But just when we were losing hope, the government has delivered” he said.

This move could transform the startup funding landscape in the coming years with the financial barrier removed. Both domestic and foreign investors would have the freedom to support Indian start-ups and investments in innovative startups, he added. Nasscom also claimed this as a significant victory as such a tax did not exist elsewhere. Despite India being the world's third-largest start-up ecosystem, the angel tax has been stifling growth by deterring legitimate investments and its abolition will boost India’s global innovation and entrepreneurial competitiveness, it said in a statement.

Angel tax was introduced in 2012 by then finance minister Pranab Mukherjee and was dubbed as a bid to curb black money. The tax was levied on capital raised more than the face value or the premium at which a startup raised money. This money was treated as an income for the startup for which they had to pay nearly 31% tax. What started initially for just domestic investors was later extended to all investors. Over the years many startups have received tax notices on the same. Arpit Chug, Chief Financial Officer, Razorpay pointed out the overall Indian private equity and venture capital investments in 2023 were about $39 billion compared to $62 billion in 2022 and this decline was aggravated by the funding winter that began in 2022 and the implications of the Angel Tax, which was also levied on the foreign investor. “Today’s announcement of abolishing angel tax for all tax classes as well as the reduction of TDS for e-commerce operators from 1% to 0.5% underscores the government’s commitment to nurturing entrepreneurship and startup growth in India” he added.

According to Tracxn’s India Tech Semi-Annual Funding Report H1 2024, Indian tech startups raised $4.1 billion in H1 2024, a 4% increase from $3.96 billion in H2 2023. However, that is still a 13% decrease compared to the $4.8 billion raised in H1 2023. India remains the fourth-highest tech startup landscape in the world, with the United States leading in overall funding volumes, followed by the UK and China. Neha Singh, co-founder of Tracxn said the removal of the Angel Tax is a strategic step towards positioning India as a global hub for innovation, increasing domestic capital formation, and enhancing the ease of doing business. With a significant barrier removed, it has also come at a crucial time for the ecosystem when there has been a contraction of funding over the past 12 months says Karan Mohla, General Partner, B Capital. “While we look forward to further details, it is a pro-innovation move and is expected to improve the ease of doing business while supporting the growth of new enterprises. It removes the uncertainty overhang and enables additional capital, both domestic and global pools of capital to be channelled into the ecosystem” he added.