Income Tax Startup Taxation

Relief for Startups, VCs as Budget 2024 Abolishes Angel Tax

The Indian startup ecosystem, which is the third-largest in the world, is expected to become a $10 trillion economy by 2030. Budget 2024-25 highlighted the biggest step undertaken to support India’s startup economy. Startups and VCs expressed relief after the abolition of the angel tax. It will eventually create a supportive environment for angel investors and startups raising funds for their growth and development.

Budget 2024-25 for Viksit Bharat: Overview

Budget 2024-25, a compilation of diverse perspectives on economic policies and reforms, has impacted the industrial leaders of various sectors. The theme mainly highlighted employment, skilling, MSMEs, and the middle class. Certain priorities are also enlisted by the Budget 2024-25 for becoming a ‘Viksit Bharat’. Lastly, the Budget provides for tax proposals to simplify indirect and direct taxes after thoroughly reviewing the Income Tax Act of 1961.

Tax Proposals Under Budget 2024-25

The tax proposal simplifying the taxes for the financial year 2024-25 (AY 2025-26) as provided in the Budget 2024-25 below explained:

• Changes in customs duty (sector-specific);
• Abolished angel tax for all classes of investors;
• Rationalized short-term and long-term capital gains;
• Reduced corporate tax rates for foreign companies;
• Increased standard deduction for salaried employees;
• Increased deduction on family pensions for pensioners;

What is Angel Tax?

Angel tax, introduced in 2012, is an income tax imposed on the capital raised or shares issued by investors of unlisted companies or startups. The tax is required to be paid when the valuation exceeds the company’s fair market value. Angel tax wipes away a major part of the investible surplus of startups and VCs raising funds. Hence, it widely impacts angel investments and startups’ growth prospects.

Abolition of Angel Tax

The Union Budget of 2024-25 is considered a dream budget for many startups as it abolished the angel tax. The abolishment of the angel tax for all asset classes (as prescribed under clause 153) was done after due consultation with the startup ecosystem. It is considered a big win for both the startups and the investor community.

The abolition of the Angel tax, which is a real Dream Budget for startups, was done after due consultation with the startup ecosystem. The abolition of the angel tax is a big win for the startup community and capital inflows. The sunset clause for the angel tax will be effective from April 1^st, 2025, and will be applicable for the assessment year (AY) 2025-26.

Reasons for Abolition of Angel Tax

The Finance Minister of India, Smt. Nirmala Sitharaman quoted the reasons for the abolition of the angel tax on Tuesday. The following are some of the specific reasons responsible for the abolition of angel tax, as provided below:

• Promote of Industry and Internal Trade
• Growth of Early-Stage Companies
• Unlock More Domestic Capital
• Encourage Investments in Early-Stage Startups
• Nurture Innovation and Startups
• Reduced Compliance Burden and Financial Strain on Startups

Impact of Abolition of Angel Tax on Startups and Venture Capitalists

The abolition of the angel tax has created a favourable environment promoting the growth and early-stage investment in startups and venture capital. The following are the impact of the abolition of angel taxes in India:

1. Provide Tax Relief

The abolition of the angel tax provides tax relief to startups receiving investments from external investors. It removed the 30% angel tax levied under the heading ‘income from other sources’ under section 56 (2) (viib) of the Income Tax Act of 1961.

2. Encourage Early Investments

Abolishing the angel tax encourages more and more investment opportunities in early-stage startups. Early-stage or pre-seed investments are crucial for young companies (companies) for better growth and innovation.

3. Attractive Destination for Startup Capital

After the abolition of the angel tax regime, India has become a more attractive destination for startup capital. Now, even non-residents can freely make fund investments in the young companies or startups of India.

4. Reduced Burden of Financial Scrutiny

The abolition of the angel tax through Budget 2024-25 will reduce the burden of financial scrutiny to some extent. The main aim of reducing the burden of financial scrutiny (a broad term that analyses how money is spent) is to shift startups’ focus to innovation and growth.

5. Reduced Administrative Hassle for Startups

Also, the abolition of the angel tax has reduced the administrative hassle for startups and young companies. Now, startups can easily afford to unlock more domestic capital without the involvement of any administrative and legal setup, which is ultimately crucial for the growth of early-stage companies.

6. Boosts Investments through PE and VC Funds

Abolishing angel taxes through Budget 2024-25 will boost various investments through (Private Equity and Venture Capital) in India. It has abolished the barrier to investment options in India, which involved a huge level of uncertainty and potential for litigation. It fosters investments in business by reducing the costs of compliance in investments.

7. Reduces Valuation Hurdles

The abolition of the angel tax reduces the valuation hurdles and markdowns faced by new-age companies like Byju’s, ShareChat, Udaan, and PharmEasy.

Conclusion

The abolition of the angel tax, as announced by Finance Minister Smt. Nirmala Sitharaman under Budget 2024-25, is a ‘huge reform’ for venture investors and startup companies. It took nearly 12 years for startup companies to be relieved from the angel tax. The DPIIT’s recommendation for the abolition of the angel tax boosts the capital formation and growth prospects of startups. Simply, it is urged that the angel tax valuation will assist in the company’s capital formation.

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