Govt announces to remove angel tax on startups for all classes of investors

New Delhi: Giving a big relief to startups, the government on Tuesday announced removal of angel tax for all classes of investors to further promote the growth of budding entrepreneurs of the country.

Angel tax refers to the income tax that the government imposes on funding raised by unlisted companies, or startups, if their valuation exceeds the company's fair market value.

"To bolster the Indian startup eco-system, boost the entrepreneurial spirit and support innovation, I propose to abolish the so-called angel tax for all classes of investors," she said.

Ahead of the Union Budget, the Department for Promotion of Industry and Internal Trade (DPIIT) has recommended removal of this levy on startups.

In September last year, the Income Tax Department notified new angel tax rules that comprise a mechanism to evaluate the shares issued by unlisted startups to investors.

While previously the angel tax -- a tax levied on capital received on the sale of shares of a startup above the fair market value -- applied only to local investors, the Budget for the 2023-24 fiscal year (April 2023 to March 2024) widened its ambit to include foreign investments.

Over 1.17 lakh startups are registered with the government. They are eligible for availing of incentives under the government's Startup India initiative.

Commenting on the announcement, Deloitte India Partner Sumit Singhania said it is a positive move as it would help reset not only the tax cost matrix for investors in startup, but for foreign strategic investors as well.

"It also puts out a progressive view of tax policy making by the government. Since this levy has stung for more than a decade since it was introduced in 2012, withdrawal of angel tax entirely means a timely course correction as the government rolls out red carpet for long term strategic investment as well more risk-capital to promote innovation and R&D," he said.

Lokesh Shah, Partner, IndusLaw, termed it as a major announcement.

"This is a huge relief for Indian companies, specifically startups. A delight for investors and private equities/venture funds supporting Indian companies," Shah said.

Taking to X, Congress leader Jairam Ramesh said, "The Indian National Congress had proposed a GST 2.0 – a Good and Simple Tax - to replace the bureaucratic monstrosity that the non-biological Prime Minister’s Government set up. This is a widely popular demand, echoed by State Governments, industry bodies, MSME organisations, and consumers. The Finance Minister has made no commitment to implement it, besides a general statement.

In a welcome move, however, the Finance Minister has heeded the Indian National Congress’s demand to abolish the Angel Tax that has disincentivised investments in India's start-ups.

Inputs from PTI