Angel Tax Removal: Boost for Startups & Investments - Goyal

New Delhi, Jul 23 (PTI) Removal of angel tax for all classes of investors will help attract investments in the segment and further promote the growth of budding entrepreneurs, Commerce and Industry Minister Piyush Goyal said on Tuesday.

The move would mainly help emerging sectors like deeptech, artificial intelligence, clean energy, among others, which require a large amount of capital at an early stage.

Giving a big relief to startups, the government on Tuesday announced removal of angel tax for all classes of investors.

Angel tax (income tax at the rate of 30 per cent) refers to the income tax that the government imposes on funding raised by unlisted companies, or startups, if their valuation exceeds the company's fair market value.

"It will further strengthen the startup ecosystem of the country. It was a long-pending demand of the industry. It will help attract investments," Goyal told PTI.

"I am quite sure that, it (the decision) will take care of everybody's interest," he added.

Section 56(2)(viib) of the Income Tax Act provides that the amount raised by a startup in excess of its fair market value would be deemed as income from other sources and would be taxed at 30 per cent.

Touted as an anti-abuse measure, this section was introduced in 2012. It is dubbed as 'angel tax' due to its impact on investments made by angel investors in startup ventures.

Earlier also, the government has made several amendments to make this tax regime more conducive for investors and startups. A change was made under the Finance Act 2023 proposed to include investments from foreign investors or non-residents within the scope of the angel tax with effect from April 2024.

Certain exemptions notified by the Central Board of Direct Taxes (CBDT) stated that the provisions do not apply to DPIIT (department for promotion of industry and internal trade) recognised startups, certain classes of foreign investors, and entities from 21 nations.

Further, guidelines regarding valuation methodologies were also notified by the CBDT.

However, it was felt that the provisions were hampering the industry at large, the growth of the startup ecosystem, particularly inbound investments, an official said.

Multiple representations were received by the DPIIT from stakeholders concerned, highlighting the potential adverse impact of the angel tax.

Before suggesting the removal, the DPIIT officials studied various international regimes and their approaches were analysed by them.

For investors, this move would infuse confidence into India's investor community and is expected to remove a lot of the risk for investors in very early-stage companies, leading to an increase in the number of overall active investors in India.

The decision will also reduce disputes and litigation, thereby providing tax certainty and policy stability. Besides, it will also bring down the demand embroiled in assessment and litigation.

As on date, about 1.44 lakh startups are recognised by the DPIIT.