Angel Tax Abolishment A Blessing For Startups In Era Of Downrounds

The Indian startup ecosystem saw its 12-year curse of angel tax end on Tuesday. The Finance Minister, Nirmala Sitharaman, abolished the tax in the Union Budget 2024. The tax was introduced by the now deceased Pranab Mukherjee when he was a finance minister in the United Progressive Alliance regime in 2012. 

An angel tax is levied on the excess premium that startups receive from angel investors as they issue shares above their face value. For years, many startups as well as venture capital investors have been asking the government to abolish it. 

“One big takeaway from the tax proposals announced in the budget this year is the clawback of the angel tax levy. It helps reset not only the tax cost matrix for investors in start-ups as well as for foreign strategic investors; it also puts out a progressive view of tax policy making by the government,” says Sumit Singhania, partner at Deloitte India. 

Experts say that it’s a timely move to course-correct as it moves to bring in long-term strategic investments and risk capital into the country. In the last two years, Indian startups have been starving for funds after funding winter-slashed investments. 

Ankur Mittal, co-founder of Inflection Point Ventures, says that the action will bring in a lot of regulatory clarity.

"Abolition of the angel tax will provide a boost to the budding Indian startup ecosystem. It will encourage the flow of capital without tax leakages, especially relevant at a time when the funding crunch is impacting startup liquidity,” says Ratna Mehta, managing partner at Fundalogical Ventures. 

While Angel Tax was always considered regressive, as it’s calculated based on a notional value, it’s been stinging more in the last two years. As per a Tracxn report, venture capital firm investments in India reached a peak of $41.6 billion in 2021, which fell to $25 billion in 2022 after a funding freeze set in May that year. The year 2023 saw it crash to $7 billion, leading many startups to go in for retrenchments and more. 

“The removal (of Angel tax) will help startup founders focus on their business growth and fundraising rather than getting taxed on some notional basis post any investor round,” says Yagnesh Sanghrajka, founder and chief financial officer at 100X.VC. 

Agrees Anil Joshi, managing partner at Unicorn India Ventures, "This will certainly help in the expansion of angel investment in India and will take away a lot of burden from the minds of everyone on tax notice for tax-paid investment. This will also free up a lot of domestic capital and improve the funding sentiment in a strong way.”

In the last few years, the number of down rounds has gone up significantly, and the value of privately held startups has been extremely volatile. PharmEasy, Udaan, Sharechat and Meesho are some of the unicorns that had to raise funds at a lower valuation than their earlier rounds. 

Since startup valuations are a fast-moving needle, abolishing the tax helps. “This (Angel tax) was an albatross that hindered much-needed capital to be deployed to deserving founders. Removal of this dreaded tax will give a huge fillip to startups in the country and free up investors to focus on the investments without having anxiety about how to deal with their implications,” says Mayuresh Raut, managing partner at Seafund, a venture capital firm. 

Apart from removing the tax, the Union Budget paved the way for more investments in startups by slashing the long-term capital gains tax for unlisted investments. “The increase in the LTCG tax rate for financial assets to 12.50% and the STCG to 20% may pose challenges for listed investments. Still, it’s a significant advantage for other financial products like startups and alternative investment funds. The reduction in LTCG tax from 20% to 12.50% for these investments will result in substantial savings and increased IRR, fostering growth and innovation,” says Anirudh A. Damani, managing partner at Artha Venture Fund.

The FM also announced a Rs 1,000 crore fund for spacetech startups. She also reduced the tax deducted on source TDS rates for e-commerce operators to 0.1% from 1% earlier.

Sitharaman also gave a push to direct-to-customer companies. “To enable MSMEs and traditional artisans to sell their products in international markets, e-commerce export hubs will be set up in public-private partnership mode. These hubs, under a seamless regulatory and logistic framework, will facilitate trade and export-related services under one roof,” she said.

Katya Naidu is a senior business journalist who writes about equity markets, startups, energy, infrastructure, real estate and healthcare.

The views expressed here are those of the author, and do not necessarily represent the views of NDTV Profit or its editorial team.