No respite for startups with pending angel tax notices; companies may still face fresh demands

The central government’s decision to abolish angel tax would not benefit companies already facing tax demands, said industry experts. In the Union Budget for 2024, Finance Minister Nirmala Sitharaman proposed to abolish the special anti-avoidance provision that has been a key concern for India’s start-up ecosystem.

The development assumes significance since several start-ups have already received such angel tax notices and most of these cases are currently pending in the courts. Tax experts say, some of the companies who received the angel tax demand notices also decided to pay out the tax to avoid litigation. Such companies will also not benefit from the Budget announcement.

“Accepting DPIIT and startup recommendation with withdrawal Angel tax will boost investment in startups especially innovative and sunrise where funding is critical for growth. Given this is prospective amendment, long pending litigations will not reap benefit of this amendment.” Said Neha Aggarwal Jain, partner, Deloitte.

“The abolishing of the angel tax for all categories of assesses is a welcome step. The provision is abolished from the current year 24-25. Hence, any infusion of premium done in past is still open to scrutiny by the tax authorities. To that extent it is discriminatory for the past infusions and the litigation may continue for those tax payers” said Punit Shah, partner, Dhruva Advisors.

Market participants are seeking one-time amnesty for the existing notices and also protection from any future notices arising out of the assessment year 24-25.

"Today's angel tax abolishment announcement is from the assessment year beginning April 1, 2025 which means it applies to the financial year starting April 1, 2024 and ending March 31, 2025. Angel tax notices can still be raised for funding raised by startups till March 31, 2024 anytime in the future. This also does not have any impact on the ongoing angel tax cases. The Startup Industry hopes that the FM will withdraw all pending cases and not issue any further notices to startups who raised funds prior to March 31, 2024.“ said Siddarth Pai of 3One4 Capital.

Last month, the GST council had scrapped the old GST notices provided certain conditions were met. It even provided a framework through which taxpayers who complied with the demand notices were made eligible for a refund of the excess GSTR paid. Market participants want a similar treatment for angel tax.