Union Finance Minister Nirmala Sitharaman has fulfilled a long pending demand of the startups by abolishing the ‘Angel Tax’. The tax applied to startups and unlisted companies when they raised capital by issuing shares to domestic investors at a price exceeding the company’s fair market value.
This excess amount was treated as income and 30.6% tax was levied on it, as the government viewed this extra funding income from ‘other sources’. The tax was first introduced in the 2012 union budget by the then Finance Minister Pranab Mukherjee during the UPA II government to prevent ‘money laundering’ through investments in unlisted companies at inflated valuations.
The Indian startup ecosystem deemed tax as problematic because the early stage investments attracted by these startups are usually based on their future potential rather than their current market value. This would ward off the potential interest from investors due to increased tax liabilities. As per the Hurun Global Unicorn Index 2024, unicorns in India have dipped due to the slowing down of the startup ecosystem. Currently, India has over 1.17 lakh DPIIT-registered startups in the country.
The demand for the abolition of the Angel Tax was also made by opposition parties and was recommended by the Department for Promotion of Industry and Internal Trade. The removal of the Angel Tax is now sure to ease the worries of the startup ecosystem.
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