Angel Tax Abolished, Big Relief For Start-Ups

The government has decided to abolish the angel tax for all classes of investors in startups, a decision that is expected to have far-reaching effects on the startup ecosystem in India. Here's a look at the history of the angel tax, the reasons behind its introduction, and the rationale for its repeal.

In her Budget speech, she also announced various changes with respect to tax rates for e-commerce players and certain financial instruments in the context of long-term capital gains.

"First of all, 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.

The removal of the angel tax is expected to be a boost for startups as it will help in promoting a more conducive environment for them.

Sitharaman also proposed to thoroughly simplify the I-T provisions for reopening and reassessment to reduce uncertainty and disputes.

"An assessment hereinafter can be reopened beyond three years from the end of the assessment year only if the escaped income is Rs 50 lakh or more, up to a maximum period of five years from the end of the assessment year.

"Even in search cases, a time limit of six years before the year of search, as against the existing time limit of ten years, is proposed. This will reduce tax-uncertainty and disputes," she said.

Further, she said long-term gains on financial and non-financial assets will attract a tax rate of 12.5 per cent while the TDS rate will be reduced to 0.1 per cent from 1 per cent for e-commerce operators.

When was angel tax introduced and why?

The angel tax was first introduced in the 2012 Union Budget by then Finance Minister Pranab Mukherjee under the UPA-II regime. The primary objective was to address the issue of money laundering through investments in startups. The tax was levied under Section 56 of the Income Tax Act, targeting investments received by startups that were perceived to be exceeding the fair market value, thus aimed at curbing the inflow of unaccounted money.

In April 2018, the government issued a notification providing an exemption for startups under Section 56 of the Income Tax Act. This exemption was applicable when the total investment, including funding from angel investors, did not exceed Rs 10 crore. To avail of this exemption, startups were required to obtain approval from an inter-ministerial board and a valuation certificate from a merchant banker.

The Department for Promotion of Industry and Internal Trade (DPIIT) has been a vocal advocate for the repeal of the angel tax. DPIIT Secretary has emphasized that the recommendation for repeal came after extensive consultations with the startup ecosystem. According to Singh, the department has provided written inputs from industry associations to the finance ministry, highlighting the negative impact of the tax on startups.

The industry has long lobbied against the angel tax, arguing that its removal would significantly aid capital formation in the country. The high tax rates were viewed as a deterrent for angel investors, making investments in startups less attractive. Founders of DPIIT-registered startups-numbering over 1,41,000-have claimed that the angel tax reduces a major part of the investible surplus, thereby adversely affecting their growth prospects.

The move to abolish the angel tax is seen as a major boost for the startup sector, fostering a more favorable environment for investment and growth. By removing this barrier, the government aims to stimulate more investment into startups, which is crucial for innovation and economic development in the country.