The Commerce Ministry has made a suggestion for the removal of the angel tax, which has been in demand from startups. However, the final decisions lay in the hands of the Finance Ministry, DPIIT Secretary Rajesh Kumar Singh. 

Rajesh Kumar said, “The decision is to be taken by the ministry of finance; we have provided our inputs. It was not raised during the pre-budget consultations.”

Venture capital investors and startup founders have been placing their hopes on Modi Government 3.0 to repel the angel tax. 

The angel tax regime was initially introduced in 2012 as an anti-abuse measure to curb money laundering. This regulation stipulated that a startup’s fundraising from angel investors could be taxed if the funding round occurred at a valuation exceeding the fair market value of the shares. The tax authorities consider the premium paid by investors as income, subject to a tax rate of approximately 31%. 

Over the years, startups and investors have expressed concerns about being harassed by tax authorities due to this provision, even in cases of legitimate investments. Startups have reported receiving tax notices for angel investments raised 3-4 years earlier. In some instances, the tax amount and late payment fees demanded exceeded the original funding received.

During the peak of the angel tax issue in 2019, a survey by LocalCircles revealed that over 73% of startups that had raised capital between Rs 50 lakh and Rs 2 crore had received angel tax notices from the income tax department.