Startup Inc hopeful of Modi 3.0's first Budget spiking the angel tax regime

The angel tax regime was originally started in 2012 as an anti-abuse measure to prevent money laundering

India’s startups and their investors are hopeful that the first Union Budget of Modi 3.0 will do away with the angel tax regime completely, after piecemeal concessions over the past several years have failed to bring any significant ease to their compliance burden.

"The recent $7 billion funding raised in H1 2024 showcases promising growth potential. To further accelerate this momentum, the elimination of the Angel Tax on startups would be a welcome move as it can increase domestic capital formation and ease of doing business," said Rahul Garg, CEO & Founder of Moglix.

Last year, a change in the angel tax provision introduced in the Union Budget raised concerns about startup investments in the country by foreign investors. This is because an exemption for money raised from foreign investors under the so-called angel tax regime was done away with in the Finance Bill, 2023. However, the exemption for investments made by SEBI-registered alternative investment funds still continued.

The angel tax regime was originally started in 2012 as an anti-abuse measure to prevent money laundering. It mandated that a startup’s fundraise could be taxed whenever the funding round happened at a valuation more than the fair value of shares – as determined by a merchant banker. Tax authorities treat the premium paid by investors as income, taxable at about 31 percent.

Over the years, startups and investors have raised an alarm about being troubled by the taxmen due to the provision even in the case of genuine investments.

After years of startups crying themselves hoarse, the government made a concession in 2019 that DPIIT-registered start-ups would be exempted from the provision. But, the fine print showed that it was not a blanket exemption for all such start-ups. It applied only to those certified by another government body called Inter-Ministerial Board (IMB).

Meanwhile, the Commerce Ministry has made a recommendation to remove the angel tax, as has been the demand from startups, however, the final decision rests with the Finance Ministry, DPIIT Secretary Rajesh Kumar Singh said in a media address on July 4.

“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,” Rajesh Kumar Singh said.