DPIIT Proposes Angel Tax Repeal

The Department for Promotion of Industry and Internal Trade (DPIIT) has proposed the elimination of the “angel tax” on startups. This proposal, aimed at easing funding and attracting investors, might be announced in the Union Budget.

What is Angel Tax?

Angel tax is levied on private companies for funds raised above their fair market value, primarily from angel investors. Introduced under Section 56(2) VII B of the Income Tax Act, this tax treats premiums on share sales to foreign investors as “income from other sources,” subjecting them to taxation.

History

The angel tax was introduced in the 2012 Union Budget by then Finance Minister Pranab Mukherjee to prevent money laundering. In April 2018, a significant amendment exempted startups from this tax if their total investment, including from angel investors, did not exceed ₹10 crore. However, obtaining additional licenses and valuation certificates remained a requirement.

DPIIT’s Recommendation

Following extensive consultations with the startup community and industry groups, DPIIT recommended the repeal of the angel tax, highlighting its adverse impact on startup funding and growth. The department conveyed these concerns to the finance ministry, suggesting that removing the tax could significantly boost capital formation in India.

Impact on Startups

Eliminating the angel tax could benefit India’s over 141,000 DPIIT-registered startups by making angel investments more attractive and financially viable. Currently, the angel tax deters potential investors by reducing funds available for startup growth and reinvestment. Business groups like the Confederation of Indian Industry (CII) have advocated for reducing this tax to enhance the startup ecosystem.

Current Challenges

The first half of 2024 saw a slight decline in startup fundraising, reflecting a challenging economic environment for new tech ventures. Significant drops in valuations of well-known startups indicate a broader slowdown in funding, exacerbated by cautious global investor sentiment. Removing the angel tax could help mitigate these issues by encouraging more robust business activities.