India Abolishes Angel Tax, Boosts Startups

The Indian government has abolished the contentious “angel tax,” providing a significant boost to the country’s startup ecosystem.
Why it matters: The removal of this tax is expected to facilitate a surge in funding for emerging businesses, enabling startups to attract more investment with increased confidence.
The details:

• The angel tax was previously levied on investments in startups deemed to exceed their fair market value, often discouraging investors due to excessive tax burdens and bureaucratic hurdles.
• Entrepreneurs across the country have welcomed this move, predicting a more vibrant and dynamic market for innovation and growth.
• Industry experts believe that the abolition of the angel tax will lead to an enhanced inflow of domestic as well as foreign capital.
• This policy change is poised to help India’s burgeoning tech industries and other startup sectors, positioning them more competitively on the global stage.

With the funds gate now open, startups can look forward to scaling their operations, exploring new markets, and tapping into previously inaccessible resources. Investors, too, are expected to take advantage of the more favorable conditions, leading to a virtuous cycle of investment and growth.
What they’re saying:

• “To bolster the India startup ecosystem, to boost entrepreneurial spirit and support innovation, I propose abolishing angel tax for all classes of investors,” Finance Minister Nirmala Sitharaman said in her budget speech.
• “It is a watershed moment in the Indian startup story. A tax on capital is antithetical to capital formation and this has long been used to harass startups and investors,” Siddarth Pai, co-founder and partner at venture capital fund 3one4 Capital, said.
• “The removal of the tax will foster a more supportive environment for investments in the startups and will certainly fuel innovation and growth in the startups. This is essential for startups to remain in India and build from here,” Amit Mehra, CFO of venture capital fund Lightspeed, added.

The other side: For years, prominent voices in India’s startup ecosystem have railed against the angel tax, arguing it was choking off vital funding for innovation.
What’s next: This policy reform marks a significant step in the government’s ongoing efforts to create a more conducive environment for business development, promising a brighter future for the country’s entrepreneurs.

Full story

The Indian government has abolished the contentious “angel tax,” a move that is expected to significantly boost the country’s startup ecosystem. The angel tax, which was levied on investments in startups deemed to exceed their fair market value, often discouraged investors due to excessive tax burdens and bureaucratic hurdles. Entrepreneurs and industry experts have welcomed this decision, predicting a surge in funding for emerging businesses.

They believe that the removal of the angel tax will enable startups to attract more investment with increased confidence, leading to a more vibrant and dynamic market for innovation and growth. Finance Minister Nirmala Sitharaman announced the abolition of the angel tax for all classes of investors during her budget speech. “To bolster the India startup ecosystem, to boost entrepreneurial spirit and support innovation, I propose abolishing angel tax for all classes of investors,” she said.

The angel tax, introduced in 2012 to control money laundering, has long been a pain point for early-stage companies and their backers.

Angel tax abolished for startups

It taxed investments in startups when valuations exceeded what tax officials deemed fair market value, which often clashed with investors’ more optimistic projections.

Siddarth Pai, co-founder and partner at venture capital fund 3one4 Capital, called the move a “watershed moment in the Indian startup story.” He added, “A tax on capital is antithetical to capital formation and this has long been used to harass startups and investors.”

The problem stemmed from how different parties valued startups. Investors typically use discounted cash-flow methods, betting on future potential, while tax authorities looked at current worth, which is usually low for fledgling startups. This mismatch led to headaches for founders trying to raise capital.

Amit Mehra, CFO of venture capital fund Lightspeed, said the abolition of the angel tax will help reduce the “significant uncertainty on taxation of investments received by startups on account of the angel tax provisions.”

Industry experts believe that the removal of this tax will lead to an enhanced inflow of domestic and foreign capital, helping India’s burgeoning tech industries and other startup sectors become more competitive on the global stage. With the funds gate now open, startups can look forward to scaling their operations, exploring new markets, and tapping into previously inaccessible resources. This policy reform marks a significant step in the government’s ongoing efforts to create a more conducive environment for business development, promising a brighter future for the country’s entrepreneurs.