In a major boost for start-ups, Finance Minister Nirmala Sitharaman on Tuesday abolished angel tax, which is a tax levied on the capital raised by unlisted companies through the issue of shares from Indian investors. This tax is imposed when the share price at which the shares are issued is deemed to be higher than the fair market value of the company.
Essentially, if the income tax department believes that the valuation of a startup is inflated, it can impose a tax on the difference between the perceived fair value and the issue price. This tax rate up until now was a hefty 30.9%.
The Abolishing of the Angel Tax will create a more favorable environment for startup growth and early-stage investments in India.
The removal of this tax will likely encourage more investments in early-stage startups and increase the growth of innovation.
“The abolishment of the angel tax is a major win for the Indian startup ecosystem. Especially for young companies, securing early-stage funding is crucial for growth and innovation. This should be especially helpful for attracting investment from outside India. Non-resident investors have been facing double trouble in complying with the angel tax and FEMA valuation rules, after extension of the angel tax regime to non resident investors recently. This change simplifies things and makes India a more attractive destination for startup capital, said Kunal Savani, Partner, Cyril Amarchand Mangaldas.
“Investors previously deterred by the tax implications may now find it more appealing to fund young companies, potentially leading to increased capital flow into the startup ecosystem. By eliminating the Angel Tax, the burden of financial scrutiny and administrative hassle will be greatly reduced on startups, enabling them to focus more on innovation and growth. This move will cement India’s position as a global startup hub. Simplifying the taxation framework for startups and investors is expected to unlock more domestic capital, which is crucial for the growth of early-stage companies, especially in the current funding climate,” said Ankit Jain, Partner, Ved Jain & Associates.
“The dreaded Angel tax was a barrier to investments into India since this involved a huge amount of uncertainity and potential for litigation. This was made worse when then exemption available to foreign investors was withdrawn. The announced removal of this section will certainly foster investments into businesses and reduce compliances and costs of investments,” said Pallav Pradyumn Narang, Partner, CNK.
First Published: Jul 23 2024 | 12:47 PM IST
