Union Budget 2024: India Abolishes Angel Tax, Igniting Joy for Startups

Angel Tax has been a matter of contention for several years. Angel tax is the income tax charged by the government on funding obtained by unlisted companies or startups when their valuation surpasses the company’s fair market value. It is categorized within Section-56 (II) (viib) of the Income Tax Act.

To start a company, capital is essential; this is where investors, often referred to as “angels,” come in by providing funding in exchange for shares or equity in the startup, which is usually an unlisted company. If a startup raises funds above its fair market value, it must pay a 30% tax on the excess amount. This additional money is considered income and is subject to taxation, known as the Angel Tax. However, to encourage entrepreneurship, there have been exemptions to this rule over time.

To further support the country’s growing entrepreneurs, the government announced on 23^rd July the elimination of the angel tax for all types of investors, providing significant relief for companies. The finance minister, Nirmala Sitharaman, announced it while presenting the Budget for FY 2024-25. The long-awaited Angel Tax battle is finally over. Its abolition is expected to boost investments and attract more startups to the Indian Ecosystem.

When did India First Introduce the Angel Tax?

The Angel Tax was introduced in 2012 through the Finance Act of that year, during the tenure of the then Finance Minister, the late Pranab Mukherjee, who later became the President of India. Initially, the tax only applied to domestic investors. However, the scope of the Angel Tax was expanded in the 2023-24 budget to include foreign investments as well.

What is the Purpose Behind Angel Tax?

Angel Tax is designed to reduce illegal money laundering and stop the flow of funds with unknown origins. Yet, it has sparked disagreement among new investors and startups, who argue it obstructs creativity and fundraising efforts.

To address these worries, the government has implemented different exceptions and support measures for qualifying startups, easing the tax load and fostering a more encouraging atmosphere for entrepreneurial development. Proper tax planning is the key to further reducing the tax burden. Moreover, seeking expert help for the same will be helpful.

Problems Entrepreneurs Faced Before Angel Tax Imposition

Entrepreneurs often begin with limited capital. The imposition of the Angel Tax can be discouraging, as it adds a tax burden that may distract them from focusing on their business goals.

Following are some issues that Entrepreneurs faced before July 23^rd,2024;

• Struggle to Prove– It was difficult for the startups to prove their worth, and because of that, it was hard for them to get an investor.
• Uncertainty—Investors became cautious about the tax implications. This uncertainty slowed down the funds of the startups, hindering their growth.
• Financial Stress—Because of the tax levied on an extra amount exceeding their market value, managing the money to meet their goals was a burden.
• Paperwork—Paperwork itself causes stress. Starting a business and dealing with piles of paper makes complying with taxes more stressful.
• Demotivation—Financial burdens demotivate a person. Entrepreneurs find it hard to think of new ideas for their businesses. Many entrepreneurs even back off.

What’s the Expert Opinion on Angel Tax Abolition?

The experts noted that eliminating angel tax could boost the trust of both local and global angel investors in funding Indian startups. This may result in a surge of funds, promoting creativity and expansion within the startup environment.

Startups faced extended examination and documentation requirements to explain their worth, taking attention away from key business operations. Scrapping the Angel Tax is anticipated to greatly lessen the regulatory obligation and monetary pressure on startups, facilitating their ability to secure initial funding.

When Will the New Rules Come into Effect?

As per the Budget statement, modifications to the angel tax scheme will be implemented from April 1, 2025, and applicable from the assessment year 2025–2026.

Positive Impact of Abolishment of Angel Tax

Startups play a crucial role in the country’s economic growth. Many positive impacts are to be seen now since the Angel Tax has finally been abolished. Some of them are listed below;

• Increased Investment: Now that the tax implications have been reduced, investors will fund the startups without hesitation.
• Innovative: Entrepreneurs will be more likely to be innovative and willing to grow their businesses because they know that they have fewer financial problems to deal with.
• Government policy alignment: Abolishing the Angel Tax indicates that the government is trying to make a better market for entrepreneurs to let their start-ups grow.
• More startups: According to the saying, ‘The More the Merrier, ‘ more people will be motivated to set up their startups, which would definitely have a positive impact on the growth of both the business and the country. 
• Job creation: Manpower is needed to perform any sort of work. This will create job opportunities for many people.
• Global Engagement: Investors across the world will see India as a good market to invest in with a lesser tax burden. Being known as a better option to invest improves India’s global reputation and attracts investors.

Conclusion

Abolishment of the ‘Angel Tax’ is a big win. Removing the angel tax in India will have a transformative impact on startups. This action eliminates a significant financial obstacle, enabling business owners to concentrate on expanding and creating new ideas. By making this supportive change, India solidifies its status as a prominent global hub for startups, creating a more dynamic and promising environment for entrepreneurs.

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