In anticipation of the forthcoming Union Budget, the Department for Promotion of Industry and Internal Trade (DPIIT) has voiced its support for the removal of the contentious angel tax, responding to widespread industry demand. Initially introduced to curb the use of unaccounted money, the angel tax has been viewed by the startup community as a significant barrier to raising essential capital.
DPIIT Secretary Rajesh Kumar Singh confirmed the department’s stance during a press briefing on Thursday, emphasizing the ongoing dialogue with the startup ecosystem. “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 stated.
The Confederation of Indian Industry (CII) had previously highlighted this issue in its Union Budget recommendations, arguing that removing the angel tax would “greatly aid capital formation in the country.”
The angel tax, introduced in 2012, was designed to deter the generation and use of unaccounted money through the subscription of shares of a closely held company at a value higher than the fair market value of the firm’s shares. Its scope was expanded last year to include non-resident investors, a move that faced strong opposition from the startup community.
Non-resident investors play a crucial role in funding Indian startups, which rely heavily on foreign capital due to the nascent stage of the ecosystem. Successful Indian startups often receive backing from investors in the US and China.
The industry argues that the tax on the difference between the issue price of unlisted securities and their fair market value hampers funding, as investors typically invest in startups based on their future potential, which should not be mistaken for money laundering.
Investment in Indian startups has already been declining. According to a Bain & Company report, Indian private equity and venture capital investments fell to $39 billion in 2023 from $62 billion in 2022, leading to job losses within the startup sector. Over 100 Indian startups laid off more than 15,000 employees in 2023 as the funding slowdown continued.
Indian startups experienced a significant decline in fundraising, with a 72% drop in the compound annual growth rate (CAGR) of funding over the past three years. The challenging market environment has been marked by cash flow issues, limited funding availability, and low customer demand, as reported by Nasscom and Zinnov.
The angel tax, a 30.6% income tax, is imposed when an unlisted company issues shares at a price higher than their fair market value. The startup community argues that this tax misinterprets the nature of investments made based on future potential and discourages vital funding.
The Finance Ministry is expected to take an integrated view on the matter as inputs from various industry stakeholders are considered in the lead-up to the Union Budget.
