Finance Minister Nirmal Sitharaman's announcement abolishing angel tax for all classes of investors in startups has brought cheer to the sector, with many calling it a watershed moment.
Angel Tax is an income tax levied at the rate of 30.6% when an unlisted company issue shares to an investor at a price higher than its fair market value. Most startups have been demanding the removal of angel tax for long as it treated investments received by startups from external investors as "income from other sources". This provision was a huge burden for startups in their early stages as most of them rely heavily on external funding. This was also making angel investors wary of investing in startups.
However, the budget announcement came as a relief for the startup sector. "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.
Many stakeholders welcomed the news, calling it a "watershed moment".
Dr Omkar Rai, executive chairman of Startup Odisha, took to X to hail the decision. "Abolishing #AngelTax for all classes of startup investors is an exhilarating provision in the #Budget2024 that would be a shot in the arm for startups & would go a long way in ensuring an adequate flow of risk capital in the #startup ecosystem & help it thrive even more," he said.
Siddarth Pai, managing partner, 3One4 Capital, told Moneycontrol that the announcement was a huge reform essential for startups to remain in India and build form here. "A tax on capital is antithetical to capital formation and this has long been used to harass startups and investors. Given the mandatory dematting of securities, Section 68, disclosure of unlisted investments in tax returns has plugged the transparency gap for which Angel Tax was created. It took 12 years, but the Startup Industry can heave a sigh of relief that the dreaded angel tax has been removed," he added.
Former Finance Minister P Chidambaram too praised the move on X: "Was pleased to hear that the FM will abolish the Angel Tax. Congress has pleaded for the abolition for many years and most recently in the Congress Manifesto on page 31."
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.