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Ahead of the Union Budget presentation expected later this month, the Department for Promotion of Industry and Internal Trade (DPIIT) has backed the industry’s demand to remove angel tax that the policymakers introduced to deter the use of unaccounted money but was viewed by startups as an impediment to much needed capital raising.
DPIIT Secretary Rajesh Kumar Singh told the press Thursday that the department has reiterated its recommendation to remove angel tax based on the discussions with the startup ecosystem.
This comes after the Confederation of Indian Industry (CII) in its Union Budget recommendation last month sought the removal of the tax stating that such a move would “greatly aid capital formation in the country”.
“Based on consultations with the startup ecosystem, we have recommended the removal of angel tax. We had recommended this in the past as well. Ultimately, the integrated view will be taken by the Finance Ministry on angel tax. It is an input from our side. We have done it several times. The written inputs from industry associations, we have passed on to the Finance Ministry,” Singh said.
While the angel tax was first introduced in 2012 to deter the generation and use of unaccounted money through the subscription of shares of a closely held company at a value that is higher than the fair market value of the firm’s shares, its scope was widened even to non-resident investors from April 1, 2024 during last year’s Union Budget that saw strong opposition by startups.
Non-resident inventors are one of the biggest sources of funding in the country as the startup ecosystem in the country is still at a nascent stage and greatly depends on foreign capital. Some of the most successful Indian startups had been backed by investors based in the US and China.
The industry says taxes levied on the difference between issue price of unlisted securities and its fair market value has hurt funding as investors fund startups based on their future potential and it may be incorrect to see it as a sign of money laundering.
Moreover, investments in startups had already been slowing. The Indian private equity and venture capital investments in 2023 stood at $39 billion compared to $62 billion in 2022, as per a report by Bain & Company. This resulted in job losses in Indian startups too.
The changes in the angel tax provisions came at a time when an estimated 100 Indian startups laid off over 15,000 employees in 2023, as funding winter that began in 2022 persisted. Moreover, Indian startups witnessed over 60 per cent decline in funding in terms of value in 2023.
Apart from registering a record low in fundraising sentiment in over half a decade, Indian start-ups also saw a decline of 72 per cent in the CAGR of funding in the last three years – signalling that the venture capital-fuelled boom that followed the pandemic has now come to a halt. According to a report by Nasscom and Zinnov, tech start-up founders reaffirmed the challenging market environment – cash flow issues, funding availability and low customer demand were cited as top challenges in 2023.
Why is angel tax contentious?
Angel tax, an income tax at the rate of 30.6%, is levied when an unlisted company issues shares to an investor at a price higher than its fair market value agreed to by both parties. The industry says taxes levied on the difference between issue price of unlisted securities and its fair market value has hurt funding as investors fund startups based on their future potential and it may be incorrect to see it as a sign of money laundering.
