Angel tax abolition ended notice nightmares, feels startup sector

Funding Freedom:

• Finance Act 2012 imposed angel tax on investments exceeding a startup’s fair market value to curb money laundering
• The taxation process became cumbersome, involving lengthy documentation and verification
• The abolition of angel tax will alleviates the anxiety of receiving tax notices for investors

Hyderabad: Finance Minister Nirmala Sitharaman on Tuesday announced the abolition of angel tax for all investors, while presenting the seventh Union Budget 2024-25 in Lok Sabha. Startup founders and angel investors here have hailed the proposed move as a relief from constant anxiety of receiving tax notice under the decade long tax regime.

The Finance Act 2012, mentions that total investment value in a startup if exceeds the company’s fair market value, then that investment greater than FMV is categorised as income from other sources, and the tax imposed on it is termed as angel tax.

Mainly introduced to curb money laundering, the taxation process soon became a source of earning kickback, during initial phase of its roll out.

“In 2018-19, we had raised investment from an individual angel investor. Later we received an I-T notice saying that the received fund is an income as the valuation is high. We go ahead with raising investment only after the valuation is conducted by an external body. If the I-T department wants to verify the source of money they can anytime check the income statement of the investor as we attach their Pan copy’s too,” a startup founder told Bizz Buzz.

Early stage startups channel their time into developing their product, building team, acquiring clients and investors. A notice from the I-T department means that the founder has to deal with an additional task. The founder further said, “After receiving the notice, the submission of documents, visit to their office to follow up, is a time consuming lengthy process. Despite submitting the correct documents, they again ask for additional documents. We were literally forced to follow their process or settle it.”

Currently this entire process is digital (faceless). The founder again received an I-T notice recently after raising funds from another angel investor. With zero human intervention, the founder was able to settle the matter by submitting the documents online.

Abolition of Angel tax was one of the recommendations put forward by Confederation of Indian Industry. On its abolition, V Ramkrishna, CEO, Zoreum Technologies and Co-Convenor, Startup panel at CII Telangana, said, “Due to the conditions imposed under Angel tax only 20 to 25 per cent investors could fulfill the criteria’s specified under that Act. Now with the abolition all investor classes will come forward. The number of DPIIT registered startups in 2023 stands at 1.34 lakh. All these startups have generated revenue of Rs 12.34 lakh crore and employment of 18 lakh. Now with the abolition, we will be able to witness three-fold growth in these numbers, in the coming years.”

Confident about this ‘new reform’ that will go a long way in boosting founders’ and investors’ confidence in Indian startup ecosystem, angel investor and Co-founder of Kyt Ventures, Dr Anu Gupta said, “As an angel investor and founder, I believe this move will bolster the startup space creating a more favourable environment for both innovation and investment.

Angel tax led to a sense of uncertainty and anxiety among startup founders living under a constant fear of tax notices.”