Budget 2024: Startups pin hopes on relief from Angel Tax
Industry insiders call for overhaul of provision; say firms need a big injection of funds
- Jul 11, 2024,
- Updated Jul 11, 2024 12:17 PM IST
As the Union Budget 2024-25 nears, the start-up ecosystem is hoping that Finance Minister Nirmala Sitharaman will provide them some relief this year from their biggest concern–Angel tax.
Angel tax is a tax levied on the capital raised by unlisted companies via the issue of shares to investors. This tax is applied when any start-up receives an investment at a valuation which is higher than its fair market value (FMV), and the excess amount is considered as income, subject to taxation. The tax was introduced in India in 2012 under Section 56(2)(vii)(b) of the Income Tax Act to curb money laundering. However, it has become a significant concern for startups, as it can hinder their ability to raise funds and grow.
“This provision continues to create a substantial tax risk for any unlisted entity raising funds,” states NASSCOM's memorandum on start-ups' budget expectations.
According to the memorandum, start-ups in India face a 30% tax if investments exceed the fair market value (FMV), which is often based on future assumptions and easily questioned. This high risk of taxing genuine investments hampers capital raising. Despite government attempts to address this over the past 12 years, the core issue remains unresolved. No other country has a similar provision, and India's Income Tax already has Section 68 to address unexplained funding sources.
Additional measures to combat tax avoidance and money laundering have been implemented since the introduction of the angel tax. According to Dheeraj Bansal, Co-Founder of Recode Studios, a Pre Series A funded D2C cosmetic and skincare brand, despite India's thriving start-up scene, ongoing challenges, especially in securing funding, hinder further development.
“Funding fell sharply by more than 30% last year, underscoring the urgent need for action. Due to the angel tax which levies a fee on funds raised by angel investors, early-stage investments have been severely hindered. Furthermore, startups are burdened by several taxes and hefty compliance expenses, which inhibits innovation and growth. We expect that the forthcoming budget will address these important issues by creating incentives to stimulate investment, streamlining regulatory procedures, and doing away with the angel tax.”
He added that these policies are essential to support innovation, empower start-ups, and enhance India's economic environment. Brijesh Damodaran Co-Founder & Partner, Auxano Capital, says that the angel tax needs an overhaul as for start-up founders, every penny counts. “The start-up ecosystem in India has entered the next stage and need more domestic capital to be allocated in this space. Providing additional tax incentives, such as exempting the first 20% of profit from the sale or transfer of holdings, for investors and promoters will significantly support this growth. The sector urgently needs domestic capital,” he mentioned.
Eliminating angel tax will enhance capital formation and attract vital investments says Vinod K Singh, Co-Founder and CTO of Concirrus, a risk management AI-powered platform for marine insurance.
Despite initiatives like Startup India, Atal Innovation Mission, and the National Strategy for Artificial Intelligence, Indian start-ups still face challenges. Singh highlights issues such as limited early-stage funding, bureaucratic hurdles, and high capital costs. He suggests that expanding the Fund of Funds and introducing low-interest loans would be beneficial.
"Learning from global models could also help,” he asserts adding that tax incentives like those in Singapore, more government-funded incubators and innovation hubs similar to Israel, especially in tier 2 and 3 cities, and R&D tax credits like the UK would support early-stage companies. These steps are essential to foster a thriving startup ecosystem and drive economic growth in India.
Overall, the start-up ecosystem views the angel tax as the biggest hurdle to their growth and anticipates substantial relief to elevate their position in the business ecosystem.
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As the Union Budget 2024-25 nears, the start-up ecosystem is hoping that Finance Minister Nirmala Sitharaman will provide them some relief this year from their biggest concern–Angel tax.
Angel tax is a tax levied on the capital raised by unlisted companies via the issue of shares to investors. This tax is applied when any start-up receives an investment at a valuation which is higher than its fair market value (FMV), and the excess amount is considered as income, subject to taxation. The tax was introduced in India in 2012 under Section 56(2)(vii)(b) of the Income Tax Act to curb money laundering. However, it has become a significant concern for startups, as it can hinder their ability to raise funds and grow.
“This provision continues to create a substantial tax risk for any unlisted entity raising funds,” states NASSCOM's memorandum on start-ups' budget expectations.
According to the memorandum, start-ups in India face a 30% tax if investments exceed the fair market value (FMV), which is often based on future assumptions and easily questioned. This high risk of taxing genuine investments hampers capital raising. Despite government attempts to address this over the past 12 years, the core issue remains unresolved. No other country has a similar provision, and India's Income Tax already has Section 68 to address unexplained funding sources.
Additional measures to combat tax avoidance and money laundering have been implemented since the introduction of the angel tax. According to Dheeraj Bansal, Co-Founder of Recode Studios, a Pre Series A funded D2C cosmetic and skincare brand, despite India's thriving start-up scene, ongoing challenges, especially in securing funding, hinder further development.
“Funding fell sharply by more than 30% last year, underscoring the urgent need for action. Due to the angel tax which levies a fee on funds raised by angel investors, early-stage investments have been severely hindered. Furthermore, startups are burdened by several taxes and hefty compliance expenses, which inhibits innovation and growth. We expect that the forthcoming budget will address these important issues by creating incentives to stimulate investment, streamlining regulatory procedures, and doing away with the angel tax.”
He added that these policies are essential to support innovation, empower start-ups, and enhance India's economic environment. Brijesh Damodaran Co-Founder & Partner, Auxano Capital, says that the angel tax needs an overhaul as for start-up founders, every penny counts. “The start-up ecosystem in India has entered the next stage and need more domestic capital to be allocated in this space. Providing additional tax incentives, such as exempting the first 20% of profit from the sale or transfer of holdings, for investors and promoters will significantly support this growth. The sector urgently needs domestic capital,” he mentioned.
Eliminating angel tax will enhance capital formation and attract vital investments says Vinod K Singh, Co-Founder and CTO of Concirrus, a risk management AI-powered platform for marine insurance.
Despite initiatives like Startup India, Atal Innovation Mission, and the National Strategy for Artificial Intelligence, Indian start-ups still face challenges. Singh highlights issues such as limited early-stage funding, bureaucratic hurdles, and high capital costs. He suggests that expanding the Fund of Funds and introducing low-interest loans would be beneficial.
"Learning from global models could also help,” he asserts adding that tax incentives like those in Singapore, more government-funded incubators and innovation hubs similar to Israel, especially in tier 2 and 3 cities, and R&D tax credits like the UK would support early-stage companies. These steps are essential to foster a thriving startup ecosystem and drive economic growth in India.
Overall, the start-up ecosystem views the angel tax as the biggest hurdle to their growth and anticipates substantial relief to elevate their position in the business ecosystem.
For Unparalleled coverage of India's Businesses and Economy – Subscribe to Business Today Magazine