- In a significant relief for India’s fledgling start-ups, the finance minister announced the scrapping of the contentious angel tax on foreign investments.
- This measure is expected to ease funding woes, bolster the Indian start-up ecosystem, boost entrepreneurial spirit, and support innovation.
- The significance of this development is underscored by the fact that start-up funding fell 60% in 2023 to $10 billion, according to the Indian Tech Startup Funding Report 2023 by Inc42.
| Angel Tax • The Angel Tax, formally known as Section 56(2) (viib) of the Income Tax Act (ITA), was introduced in 2012. • It aimed to regulate investments made by unlisted companies through the issuance of shares, imposing a tax on any premium paid by investors above the fair market value of the shares. • This premium was classified as “income from other sources” and subjected to taxation. • This provision was added to the ITA by the Finance Act of 2012 to address concerns about money laundering and the inflow of unaccounted funds. |
- The angel tax had been opposed by several industry players who believed it curbed foreign investment.
- Several key issues arose with the Angel Tax,
- Including its impact on share valuation
- The treatment of estimated figures in the discounted cash flow (DCF) method
- The scrutiny of funding sources and investor credibility.
- The retrospective application of the tax and its
- The effect of the conversion of convertible instruments into equity.
Dig Deeper: Read about the perks that startups in India enjoy under the Start-Up India Scheme.
