Budget announcement on abolition of angel tax cheers startups, investors

New Delhi: Startup and venture funds on Tuesday cheered the Budget decision on the abolition of angel tax for all investor classes, terming it a "game-changer" that would remove significant barriers in growth and foster a vibrant and dynamic ecosystem.

Angel tax refers to the tax that the government imposes on funding raised by unlisted companies, or startups if their valuation exceeds the company's fair market value.

"To bolster the Indian startup eco-system, boost the entrepreneurial spirit and support innovation, I propose to abolish the so-called angel tax for all classes of investors," Finance Minister Nirmala Sitharaman said in her Budget speech.

The angel tax issue has been a thorn on the side of startup founders and investors, and venture capitalists, startups and industry associations have long been batting for its removal.

"The abolition of the 'angel tax' is a game-changer, removing a significant barrier that has long hindered the growth of startups and discouraged investment. This progressive step will undoubtedly foster a more vibrant and dynamic startup ecosystem, encouraging innovation and entrepreneurship across the country," Prateek Jain, Associate Director-Startup and Alliances, Alliance of Digital India Foundation (ADIF) said.

Shyam Menon, Co-Founder and Partner, Bharat Innovation Fund dubbed the move as "a significant and positive step" towards alleviating a longstanding issue in startup investing.

"For some time, angel tax 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," Menon said.

According to the industry, the decision would stimulate an increase in capital inflow, and foster more supportive environment for the formation and growth of startups within the country.

It will lead to a cessation of fresh litigation, noted Brijesh Damodaran, Partner at Auxano Capital.

"Furthermore, funds that would have been tied up in deposits for cases involving notice issuance cease. This 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," Damodaran pointed out.

Arjun Malhotra, General Partner of Good Capital described the development as a huge win for the Indian startup ecosystem.

"It's heartening to see the government not only listening but taking decisive action to support innovation. 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," Malhotra noted.

Tech Entrepreneurs Association of Mumbai believes that startups will now be better positioned to scale operations, invest in technologies, and create high-quality jobs.

This decision would also boost investor confidence, encouraging more angel investors to support emerging ventures, they said.

The establishment of Rs 1,000 crore venture capital fund dedicated to boosting the space sector is another forward-thinking initiative, Mahankali Srinivas Rao, CEO of T-Hub said.

Ankur Mittal, Cofounder of Inflection Point Ventures said that while the fine print is awaited, the announcement on the abolishment of angel tax "has the ability to bring a lot of regulatory clarity which generally is appreciated by the investor communities across the world".

Anirudh A Damani, Managing Partner at Artha Venture Fund observed that previously, the requirement for income tax officers to understand and assess valuations led to unnecessary conflicts and delays, involving CAs, valuers, and tax officials.

"The removal of the angel tax will make it significantly easier for us to complete transactions faster and streamline the investment process...Valuation assessments were never meant to fall within the purview of income tax officers, and this change eliminates those complications. This simplification allows us to focus on our primary job—investing in and supporting innovative startups—without the burden of navigating through cumbersome tax regulations," Damani said.