The Union Finance Minister Nirmala Sitharaman presented the full – budget 2024 today before the parliament at 11 am. To bolster the Indian start-up eco-system, boost the entrepreneurial spirit and support innovation, the FM proposed to abolish the angel tax for all classes of investors.
Angel tax is a significant consideration for both startups and investors in India. The “angel tax” refers to the income tax levied on the capital raised by unlisted companies through the issue of shares to investors. If the shares are issued at a price exceeding the fair market value, the excess amount is treated as income and taxed accordingly under Section 56(2)(viib) of the Income Tax Act, 1961.
Angel tax applies to unlisted companies, particularly startups, that receive investments from domestic investors ( both individuals and entities ) or foreign investors.
The abolition of the angel tax would have a significant and wide-ranging impact on both startups and the investment ecosystem in India. Removing the angel tax would likely lead to an increase in investment from angel investors, high-net-worth individuals ( HNIs ), and venture capitalists, as the fear of tax liabilities on investments would be eliminated.
This would restore confidence among investors, making them more willing to invest in startups without worrying about the tax implications of paying above the fair market value.
The abolition of the angel tax would create a more favourable environment for entrepreneurs, encouraging more individuals to start their own ventures. The removal of angel tax would reduce the administrative burden on startups and investors, as there would be fewer compliance requirements related to valuations and tax filings.
This proposal of FM would encourage more domestic investment in startups. Currently, the angel tax can deter domestic investors who might otherwise invest in early-stage companies.
While there may be some short-term revenue implications for the government, the long-term economic benefits are likely to far outweigh these, contributing to a more dynamic and competitive economy. The removal of angel tax would create a more inclusive and supportive environment for startups, ultimately driving economic growth and job creation.
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