In a strategic move aimed at invigorating the Indian startup ecosystem, the government has eliminated the controversial angel tax for all classes of investors. This change, hailed as a game-changer by industry stakeholders, is expected to widen the capital pool available to startups and significantly expedite the closure of funding rounds. Previously, the angel tax had posed significant barriers to investment by taxing any excess over the fair market value of shares issued by unlisted companies, a challenge that often discouraged investors from engaging with early-stage startups.

Burden of angel tax

Understanding angel tax: The angel tax, introduced in 2012, was levied at a steep rate of 30.6 per cent on investments that surpassed the company’s fair market valuation. This policy was initially aimed at curbing money laundering through unlisted companies but ended up impacting genuine investments in startups. According to Anirudh A Damani, Managing Partner at Artha Venture Fund, the tax required income tax officers to delve into company valuations—a task outside their expertise—leading to conflicts and delays. “Valuation assessments were never meant to fall within the purview of IT officers. This change eliminates those complications,” Damani told Times of India.

Impact on investors and startups

The abolition of the angel tax is expected to create a ripple effect across the startup investment landscape:

Government initiatives bolstering the startup ecosystem

The removal of the angel tax is a part of a broader governmental effort to foster a thriving startup ecosystem in India. Several initiatives have been launched to support innovation and entrepreneurship, further enhancing the attractiveness of the Indian market for both domestic and international investors.

Startup India initiative

Launched on January 16, 2016, the Startup India initiative aims to build a robust ecosystem that nurtures innovation and promotes private investments in startups. The initiative’s Action Plan includes 19 action items focused on:

The sustained efforts under this initiative have resulted in 98,119 entities being recognised as startups by the Department for Promotion of Industry and Internal Trade (DPIIT) as of April 30, 2023, creating over 10.34 lakh direct jobs across India.

ASPIRE: Promoting rural entrepreneurship

The ASPIRE (A Scheme for Promotion of Innovation, Rural Industries, and Entrepreneurship) initiative, launched by the Ministry of Micro, Small and Medium Enterprises on March 16, 2015, focusses on promoting entrepreneurship in agro-industry and rural sectors. The scheme includes:

This scheme, with a budget allocation of Rs20 crore for 2024-25, aims to create a conducive environment for rural innovation and entrepreneurship.

Atal Innovation Mission (AIM)

The Atal Innovation Mission (AIM) is a national platform designed to foster a culture of innovation and entrepreneurship. The mission promotes research and development (R&D) and supports startups through:

With a budget allocation of Rs155 crore for 2024-25, AIM seeks to drive scientific research and innovation across India.

Deendayal Antyodaya Yojana-National Rural Livelihoods Mission (DAY-NRLM)

Launched in June 2011, the DAY-NRLM aims to empower rural poor women through Self Help Groups (SHGs), helping them increase their incomes and improve their quality of life. Key components include:

The Startup Village Entrepreneurship Programme (SVEP) further supports SHGs in setting up small enterprises in non-farm sectors.

R&D in IT and Electronics

The government supports R&D initiatives in IT and electronics to increase the startup base, enhance intellectual property portfolios, and develop indigenous technologies. Key areas of focus include:

These efforts are expected to drive technological innovation and create a favorable environment for startups in emerging tech sectors.

Startup India Seed Fund Scheme (SISFS)

The Startup India Seed Fund Scheme (SISFS) with a corpus of Rs945 crore for four years starting from 2021-22, aims to provide financial assistance to startups for:

The scheme, operational since April 1, 2021, has approved Rs611.36 crore to 160 incubators as of April 30, 2023.

Credit Guarantee Fund

The Credit Guarantee Scheme for Startups (CGSS), operational since April 1, 2023, offers credit guarantees for loans extended by financial institutions to startups recognized by DPIIT. This initiative aims to provide startups with the financial support they need to scale and innovate.

A promising future

The abolition of the angel tax marks a significant milestone in India’s journey to becoming a global startup hub. By removing this major hurdle, the government has sent a strong signal of support to investors and entrepreneurs alike. As India continues to nurture its startup ecosystem through various initiatives, the future looks promising for innovation and entrepreneurship in the country. With an enabling environment now in place, Indian startups are well-positioned to drive economic growth, create jobs and lead technological advancements on a global scale.

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Union Budget: How angel tax abolishment may spur Indian startups into a new era