In the Union Budget, Finance Minister Nirmala Sitharaman announced the scrapping of angel tax for all investors. Venture investors hailed the proposed abolition of the decade-old tax regime as “a significant reform”.

Experts pointed out that the angel tax had imposed an additional burden and uncertainty on investors, especially on angel investors providing early-stage funding. This led to a decrease in potential investments and hampering startup growth.

The Indian startup ecosystem is brimming with innovation and determination, and various governmental incentives are in place to further boost this growth, although the “Angel Tax” concept often sparks debates.

Experts highlighted that eliminating this tax could boost the confidence of both domestic and international angel investors in investing in Indian startups. This could potentially increase capital flow and stimulate innovation and growth within the startup ecosystem.

Contrary to its name, Angel Tax is not a tax break. It is a provision under Section 56(2)(viii) of the Income Tax Act, 1961. Earlier, this provision considered the investment received by startups from external investors as “income from other sources” and subjects it to a tax rate of 30%.

Young startups, often strapped for funds, might need help managing the tax burden in addition to their operational expenses. The tax is imposed on any premium paid over the “fair market value” of shares, potentially leading to disagreements on valuation between startups and tax authorities.

The additional tax liability can discourage investment and impede the innovation and growth that the government aims to foster. Particularly those in the early stages that heavily rely on external funding. The tax implications can make investors more cautious about investing in startups.

Eliminating the Angel Tax is anticipated to create a more supportive environment for angel investment, ultimately benefiting the entire startup ecosystem and paving the way for India to become a global innovation hub.

The abolition of the Angel Tax for all classes of investors would be a major relief for startups. It would remove the uncertainty in the space and attract more investments, which is an essential factor for expansion.

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