In a landmark decision, Finance Minister Nirmala Sitharaman announced the abolition of the angel tax during the presentation of the Union Budget for 2024-25.
The angel tax, a contentious issue within the Indian startup ecosystem, had been seen as a major impediment to growth and innovation since its introduction in 2012 by then Finance Minister Pranab Mukherjee.
This tax, which levied around 31% on funds raised by startups from angel investors exceeding the fair market value, was originally intended to curb money laundering. However, it faced widespread criticism for stifling innovation and fundraising efforts.
Sitharaman’s announcement was met with widespread relief and optimism. “To bolster the Indian startup ecosystem, boost entrepreneurial spirit, and support innovation, I propose to abolish the so-called angel tax for all classes of investors,” she declared. This move is expected to significantly transform the startup landscape in India, encouraging both domestic and foreign investments.
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Saurabh Srivastava, former Chairman of NASSCOM and co-founder of the Indian Angel Network (IAN), expressed his support for the abolition. Srivastava, who played a crucial role in advocating against the angel tax, described it as a “knee-jerk reaction” to economic offenses that resulted in significant harm to startups. “I have lost count of the number of meetings at all levels of government that Padmaja (Padmaja Ruparel, co-founder of IAN) and I have attended over the years, and the various recommendations we put forward. But just when we were losing hope, the government has delivered,” Srivastava remarked.
The abolition of the angel tax is expected to pave the way for explosive growth in the startup sector. Srivastava predicts that the number of startups in India could surge from the current 100,000 to a million within the next five years. This growth is anticipated to drive economic expansion, create massive employment opportunities, and address critical challenges in sectors such as healthcare, agriculture, education, and the environment.
The need for reform was underscored by the significant drop in startup funding, which fell from $42 billion in FY 2022 to $11.3 billion in 2023, according to India Accelerator. By eliminating the tax, which imposed up to 30% on investments, the government aims to rejuvenate investor confidence and attract more investments. Brijesh Damodaran, Partner at Auxano Capital, emphasized that the abolition provides certainty to promoters and investors, stating, “The Sword of Damocles hanging has now come to an end.”
India’s startup ecosystem, already the third largest in the world, has ambitious goals to become a $10 trillion economy by 2030. Aparna Thyagrajan, co-founder of Shobitam and an angel investor, believes that this significant step will help achieve this goal. “The big step taken today will help us attain this goal,” she said.
Beyond startups, the abolition of the angel tax is expected to benefit small and medium enterprises (SMEs). Bhavik Vasa, founder and CEO of GetVantage, noted that this development would attract various forms of capital and financing, including equity and quasi-equity, to the high-growth segment. Manas Pal, co-founder of PedalStart, highlighted that startups can now retain more capital for growth and innovation, making them more attractive to investors and fostering a vibrant entrepreneurial environment.
However, some experts expressed caution. Shubham Jhuria from Aeravti Ventures pointed out that while the abolition removes confusion and complexity, it does not entirely simplify investments in Indian startups. Combined with the increase in Long Term Capital Gains to 12.5%, the government’s actions send mixed signals about investing in the startup sector.
Overall, the abolition of the angel tax marks a significant milestone for India’s startup ecosystem. It is a move that promises to unleash a wave of entrepreneurial energy and innovation, driving the nation towards its economic aspirations.
