In a significant move for India’s startup ecosystem, the federal government has eliminated the controversial “angel tax” for all classes of investors, addressing a long-standing issue that has hindered early-stage companies.
Finance Minister Nirmala Sitharaman announced the decision in her budget speech, stating, “To bolster the India startup ecosystem, to boost entrepreneurial spirit and support innovation, I propose abolishing angel tax for all classes of investors.”
The angel tax, originally implemented in 2012 to combat money laundering, has been a source of frustration for startups and investors. It taxed investments in startups based on valuations that often differed from investors’ projections, creating obstacles for fundraising efforts.
Despite attempts to simplify the tax in 2019, the previous structure still posed challenges for the ecosystem. The scrutiny of startup investments by the local tax authority persisted until recently, causing uncertainty and hindering growth.
Commenting on the development, Siddharth Pai, co-founder of venture capital fund 3one4 Capital, described the removal of the angel tax as a significant milestone for Indian startups, emphasizing the negative impact of taxing capital on innovation and funding.
The disparity in valuation methods between investors and tax authorities has long been a point of contention, with investors focusing on future potential and tax authorities assessing current value. This disconnect led to challenges for founders seeking capital and stifled innovation in the ecosystem.
Amit Mehra, CFO of Lightspeed venture capital fund, hailed the abolition of the angel tax as a step towards reducing uncertainty in taxation for startups, noting its positive impact on fostering a supportive environment for investments and driving growth.
The government’s decision to establish a $120 million venture capital fund to boost the country’s space economy further underscores its commitment to supporting innovation and growth in the startup sector.
This is a developing story. More updates to come.
