Is Removing Angel Tax Enough to Keep Indian Startups from Eyeing Dubai?

In a surprise move, the Government of India has abolished the angel tax, which had haunted the dreams of Indian startup founders for some time. Finance Minister Nirmala Sitharaman, who announced this decision in her Budget speech on July 23, says the move aims to help Indian startups thrive in the country.

Introduced in the 2012 Union Budget, the angel tax referred to the income tax payable on the capital raised by unlisted companies through the issue of shares at a price higher than the fair market value. Its primary purpose was never to generate revenue but to restrict funding and combat money laundering, says Sanjay Malhotra, Revenue Secretary, under the Ministry of Finance.

The removal of this tax comes at a time when several new Indian businesses are moving abroad, with Dubai in the United Arab Emirates (UAE) as their preferred destination. According to data shared by Dubai Chambers with Outlook Business, over 62,800 Indian companies were registered as active members of Dubai Chamber of Commerce at the end of this year’s first quarter.

Unlike other economies that focus on large corporate, Dubai has opened its arms to small and new-age businesses from around the world.

“All of the services we offer in Dubai, especially under the Dubai Chamber of Digital Economy, aim to support all tech (technology) startups. We do not limit our support to certain sectors because we do not want to miss opportunities for any startup in Dubai,” says Mohammad Ali Rashed Lootah, President and chief executive officer (CEO) of Dubai Chambers.

Between 2022 and 2023, the number of active member companies from India increased by around 30 per cent. In the first three months of this year alone, a total of 4,351 new Indian member companies joined, which Dubai’s industry body claims is more than any other country globally.

Migration Cost

Interestingly, the Economic Survey presented last year by V. Anantha Nageswaran, the Chief Economic Advisor (CEA) to the Indian government, had advocated for offshore startups to shift their domicile back to India. It recommended regulatory actions and “solution-focused strategies” to discourage this migration.

Any migration trend would potentially be a blow to the domestic economy. According to a 2022 report by National Association of Software and Service Companies (NASSCOM), the relocation trend resulted in a 15 per cent reduction in economic activity in the Indian startup ecosystem for the fiscal year 2022-23, impacting job creation, innovation, and growth of gross domestic product (GDP).

What the report further highlighted was a decline in investments in Indian startups, with a 20 per cent decrease in funding amounts, and a 15 per cent decrease in the number of deals.

Rolling back the angel tax could be a step by the Indian government to prevent innovative startups from flocking to Dubai. But saving on taxes is not the only factor seducing these new-age businesses.

Beyond Taxes

Sayed Munaf, chief sales officer at Telr, a payment gateway provider in Dubai, notes the reason behind this migration. “In the last 18 months, we have seen many companies relocating from India to Dubai. While we initially assumed it was to save on taxes, conversations with these companies reveal that the ease of doing business, the ability to scale, and clear and transparent regulations are major factors in their decision,” he says.

For these reasons, Dubai has emerged as the top destination for tech foreign direct investments (FDI) from India in 2023. Despite India improving its ranking in the World Bank’s Ease of Doing Business Index from 142nd in 2014 to 63rd in 2021, its policy framework is still not on par with Dubai’s, which held the 16th position that year.

The Indian government is well aware of this fact. Before presenting the Budget, officials in the Finance Ministry consulted with all major chambers, key stakeholders, and taxpayers in India. They aim to continue this exercise throughout the year. “We will continue to do this and try to improve it further,” says Malhotra.

With the angel tax now gone, the central government in India seems to have woken up to the needs of the startup community in India. However, a lot more needs to be done to convince them to stay and contribute to the domestic economy, especially when greater opportunities await them on the other side of the Arabian Sea.

(The reporter was in Dubai at the invitation of Dubai Government)