Get All Access for $5/mo

End of Angel Tax: Investor Community Celebrates as Government Abolishes Controversial Act Much rejoicing was seen in the startup community and especially among the industry leaders from the 'Funds' side of things, as the Indian Central Government abolished what was known as 'Angel Tax' in a historic budget announcement led by Finance Minister Nirmala Sitharaman.

By Prince Kariappa

Opinions expressed by Entrepreneur contributors are their own.

You're reading Entrepreneur India, an international franchise of Entrepreneur Media.

Press Information Bureau

Much rejoicing was seen in the startup community and especially among the industry leaders from the 'Funds' side of things, as the Indian Central Government abolished what was known as 'Angel Tax' in a historic budget announcement led by Finance Minister Nirmala Sitharaman.

History of Angel Tax

Section 56(2)(viib) of the Income Tax Act, often referred to as the 'Angel Tax' was introduced by the Government of India as part of the Finance Act of 2012. The primary objective of the provision was to prevent tax evasion and most importantly, money laundering through infusion of unaccounted funds, disguised as investments into closely held companies and startups.

According to the act, any premium received by a closely held company over the fair market value (FMV) of its shares was taxable as 'income from other sources'. The startup-investor community engaged in legal practices was left particularly jubilant with the deletion of the act as the provision's primary target was the investments received by startups from angels and venture capitalists.

Unhappy Funding Community

Fair to say, the community has always been expressing significant concerns since its implementation, with thought leaders arguing that it aided in hindering the inflow of capital into what is termed as a 'burgeoning Indian startup ecosystem'. Arguments were made that the valuation of startups was subjective and did not align with traditional valuation methods, experiencing unfair tax burdens.

In response, the government started providing exemptions and clarifications over the years on the matter, with a significant move made in recognizing startups that met certain criteria enjoyed exemption from Section 56(2)(viib).

In 2019, the government revised the guidelines to further ease the tax whip with exemption criteria expanded with the addition of a more straightforward process for obtaining said exemptions.

Despite the minor tweaks, startups and investors combined continued to lobby against the rules and batted for more relaxed norms. In a historic budget widely described as benign for the agri-sector and the wider middle class, a significant announcement was made, outlining the current government's plans to foster further and benefit from one of the world's most promising startup and investor economies.

Investors rejoice

Entrepreneur India takes a look at top investors from the community, expressing their thoughts on the forward-looking reform and abolition of the so-called 'Angel Tax'.

Vikram Gupta, Founder and Managing Partner, IvyCap Ventures

"The entire industry has been asking for it for many years; It was music to our ears when we heard that Angel Tax has been abolished," said Vikram Gupta when he took to X to express his thoughts on the budget.

Shyam Menon, Co-Founder & Partner, Bharat Innovation Fund (BIF)

Shyam Menon from BIF said that the recent abolition of the 'Angel Tax' is a significant and positive step towards alleviating a longstanding issue in startup investing and for some time, it has been a notable point of friction, creating challenges for investors and startups alike

"By eliminating this tax, the government is addressing a key barrier that has hindered investment in emerging businesses. This strategic move is expected to stimulate an increase in capital inflow, thereby fostering a more supportive environment for the formation and growth of startups within the country."

Brijesh Damodaran, Partner at Auxano Capital

The long-awaited measure is expected to significantly alleviate the challenges currently faced by both startup founders and investors. This new development will lead to a cessation of fresh litigation.

Brijesh furthered that the funds that would have been tied up in deposits for cases involving notice issuance cease and redirection of cash flow will enable businesses to allocate resources more effectively towards their core operations, thus enhancing their overall operational efficiency and growth prospects.

Harsha Mundhada, Principal, Inflexor Ventures

"The abolishment of the angel tax is a landmark decision for the Indian Startup ecosystem. It removes a major hurdle for early-stage startups seeking funding and will undoubtedly unlock a new wave of innovation and entrepreneurship across the country."

Arjun Malhotra, General Partner, Good Capital

Arjun Malhotra from Good Capital says that this is a move the community has been waiting for years and opines that the abolition is a huge win for the ecosystem.

"As an investor, I've seen firsthand how this tax has been a thorn in the side of founders and investors alike, creating unnecessary friction in the funding process. Abolishing the angel tax removes a significant barrier for startups. This reform will likely encourage more angel investors to back innovative startups, creating a more robust funding pipeline for us."

Ishpreet Singh Gandhi, Founder and Managing Partner, Stride Ventures

"The removal of the angel tax elevates the Indian investment landscape by mitigating undue fiscal burdens on early-stage capital gains, thereby catalyzing the flow of both domestic and international investments into startups and MSMEs. This forward-thinking move will unleash the full potential of entrepreneurial spirit and innovation, ensuring that the investors and founders are well-equipped to unlock scalability and drive significant economic impact."

Sandiip Bhammer, Founder and Co-Managing Partner, Green Frontier Capital

Sandiip Bhammer said that the Union 2024 budget of the Indian government adding a INR 1000 Crore VC fund to encourage early-stage businesses and innovation will greatly improve the entrepreneurial environment using much-needed financing to propel technological development and economic expansion.

"By creating a clear framework in connection with climate taxonomy for green investments will attract more capital to climate-friendly projects, ensuring transparency and fostering confidence among investors."

Ashley Menezes, Coo and Partner Indian Venture and Alternate Capital Association took his reactions to social media platform X:

Padmaja Ruparel, Co-Founder & Partner, Indian Angel Network

"Thank you Honourable Finance Minister for listening to the startups & investors. Funding sources will open up wider and startups will be able to use 100% of their cash flows to build their businesses. This will bring a huge impetus to the growth of our startups"

Ninad Karpe, founder, and partner, 100X.VC

"Angel Tax abolished! This is one of the boldest moves made by the Finance Minister. It will be a big boost to the startup world and a game changer. In addition, the space economy will get a boost with a VC fund of INR 1000 Crore. Overall, it is a balanced budget with a broad brush covering thrust on employment, skilling, and infrastructure. It will greatly boost economic activity and will aid in job creation."

Anshu Prasher, Partner, Whiteboard Capital

"The Union Budget 2024 is a significant win for the Indian startup ecosystem. The abolition of angel tax is a game-changer that will unlock substantial capital for early-stage startups. This move, coupled with the continued focus on skilling and education, sets the stage for a vibrant entrepreneurial landscape."

Satish Andra, Partner at Endiya Partners

"Eliminating the angel tax is a significant milestone for India's #startup community. This change is anticipated to boost investor confidence and speed up the flow of capital, fueling innovation and growth in our startup ecosystem." - as posted by CNBC Young Turks on X.

Anirudh A Damani -Managing Partner - Artha Venture Fund

"The removal of the angel tax will make it significantly easier for us to complete transactions faster and streamline the investment process. Previously, the requirement for income tax officers to understand and assess valuations led to unnecessary conflicts and delays, involving CAs, valuers, and tax officials."

Ratna Mehta - Managing Partner, Fundalogical Ventures

"Abolition of angel tax will provide a boost to the budding Indian startup ecosystem. It will encourage the flow of capital without tax leakages, especially relevant at a time when the funding crunch is impacting startup liquidity and is key to establishing India as an innovation hub and leader."

Prince Kariappa

Features Content Writer

News and Trends

"45% of All Ongoing Hydropower Projects in India are Ours": Patel Engineering

Patel Engineering reported a turnover of INR 4,400 crore in the last fiscal year, with a projected 10 per cent growth for the current year.

Growing a Business

Stop the Errors: Set a Review Process That Works

Mistakes make you look unprofessional and hurt your growth. Fix them today.

Side Hustle

'Hustling Every Day': These Friends Started a Side Hustle With $2,500 Each — It 'Snowballed' to Over $500,000 and Became a Multimillion-Dollar Brand

Paris Emily Nicholson and Saskia Teje Jenkins had a 2020 brainstorm session that led to a lucrative business.

Business Ideas

63 Small Business Ideas to Start in 2024

We put together a list of the best, most profitable small business ideas for entrepreneurs to pursue in 2024.

News and Trends

5 Things to Know About India's Chess Pride, Gukesh Dommaraju

He is not only inspired by Dhoni but also relies on a coach from Dhoni's cricketing era to help him prepare mentally.

Leadership

Should I Stay or Should I Go? 8 Key Points to Navigate the Founder's Dilemma

Here are eight key signs that help founders determine whether to persevere or let go.