The angel tax—the dread of the Indian startup ecosystem—saw its 12-year existence come to an end on Tuesday, as Finance Minister Nirmala Sitharaman abolished it as part of the Budget reforms for 2024.
It currently stands at about 30% for startups that are looking to raise money from investors. The tax is levied on the difference in valuation premiums, which is a common phenomena witnessed in the ecosystem.
For example, if a company issues shares at Rs 20 in a new round from investors, compared to Rs 10 in the previous round, it will have to pay a certain angel tax levy on the difference in the fair value of its share, which is Rs 10 in this case. The additional Rs 10 were taxed as income from other sources, causing the startup to not realise the full value of the money raised.
The name comes from the term angel investors, which refers to early-stage investors in startups.
The abolition caused a wave of reactions, all positive, from all stakeholders—founders, advisors and investors.
Anupam Mittal, an investor on Shark Tank India and the founder of People Group, which runs Shaadi.com, said many long-pending wrongs have been finally corrected in the Budget.
"The much-dreaded angel tax is officially abolished and startups everywhere are breathing a collective sigh of relief. Further, long-term capital gains tax has been harmonised across private and public companies at 12.5%, making startup investing more attractive," he said.
The ecosystem should next lobby for the government to address ESOP taxation issues, as well as provide tax incentives for startup investing, Mittal added.
Hershel Mehta, founder of 2AM VC, a venture capital firm and one of the first investors in unicorn Zepto, said the angel tax was meant to tackle money laundering, but ended up being a real pain for startups.
"It taxed investments above their market value, leading to tax notices and major stress for young companies and their investors—total bulls*** as there is no proper way to value two founders and laptop," he said.
For years, Indian investors have been speaking out about how this tax was unfair and causes fear, uncertainty, and doubt when it comes to private angel investing, Mehta added.
"So, I believe that the Finance Minister’s decision to finally get rid of it shows that the government is really listening and acting to the needs of startups. With the tax gone, investors can now put their money into startups without worrying about those dreaded tax notices," he said.
Investments, India Domiciles To Go Up
Abolition of angel tax could mean that early stage fundings go up by 20-30%, creating a lot more opportunities for startups and eventually, a lot more employment, according to Vineeta Singh, co-founder at Sugar Cosmetics.
Private capital gains tax, which was at 20%, is now down to 12.5%. This is another big step because that reduces the gap between the benefit of tax saving with UAE, Singapore or US, where founders are moving, she said. "I think there would be a lot more incentive for them to consider staying back in India rather than moving out," she said.
"The problem was that even if one had not made money, taxes would be incurred, which will be solved now. If you buy for Re 1 and the fair market value increases, the tax was being recognised. This is going to be a big boost for angel investors, many of whom are sitting on the edge to invest, would now probably join the bandwagon," according to CarDekho Group Founder Amit Jain.
Domiciling elsewhere was mostly only for tax reasons, and investors sometimes insist on forming companies outside India, he said. "For instance, a lot of companies get funded from Y Combinator, who insist on registering in the US. But I think with the angel tax getting sorted out, there's no reason people would still look out for domiciling outside," he added.
Ashish Tulsian of Posist said one thing that will "happen immediately" is re-domiciling of startups outside of the country, who were just moving away because there was angel tax and probability that founders and investors will get notices.
"I think this entire ripple effect, as soon as it ends, startups will stop re-domiciling out of India just to raise angel money. It's a big win because redomiciling a company outside of India just to raise angel capital is a brain drain of a different kind, and loss of GDP and revenue and ripple effects on the economy," he said.
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