The Department for Promotion of Industry and Internal Trade (DPIIT) has supported the industry’s demand to remove angel taxes ahead of the Union Budget 2024 according to a report by the Indian Express.
The Angel tax introduced by the policy makers to thwart the use of unaccounted money was seen by many startups as a hindrance to capital raising.
The development reportedly comes in the wake of Union Budget recommendations given by Confederation of Indian Industry (CII) last month when it sought to remove the tax to “greatly aid capital formation in the country”.
Rajesh Kumar Singh, DPIIT Secretary told the press about the department’s emphasis to remove angel tax based on the discussions with the startup ecosystem.
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“Based on consultations with the startup ecosystem, we have recommended the removal of angel tax. We had recommended this in the past as well. Ultimately, the integrated view will be taken by the Finance Ministry on angel tax. It is an input from our side. We have done it several times. The written inputs from industry associations, we have passed on to the Finance Ministry,” Singh said as reported by Indian Express.
Angel Tax was first introduced in 2012 to curb the generation and use of unaccounted money through the subscription of shares of a closely company at value that is higher than the fair market value of the firm’s shares. However, its scope was widened to even non-residents investors from April 1, 2024, during last year’s Union Budget that saw strong opposition by startups.
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As the country’s startup ecosystem is still at its nascent stage and greatly depends on foreign capital, Non-Resident investors are one of the biggest sources of funding in the country with India’s most successful start-ups have been backed by investors in the US and China.
The Indian private equity and venture capital investments stood at $39 billion in 2023 in comparison to $62 billion in 2022 as per a report by Bain & Company. This shows a decline in funding to the start-ups which also has lead to job losses.
The changes in the angel tax are a much-needed respite as it was estimated 100 Indian Start-ups laid off over 15,000 employees in 2023 as funding winter began in 2022. It has also resulted in an over 60 per cent decline in funding in terms of value in 2023.
Apart from registering a record low in fundraising sentiment in over half a decade, Indian start-ups also saw a decline of 72 per cent in the CAGR of funding in the last three years- signaling that the venture capital-fueled boom that followed the pandemic has now come to a halt.
The tech start-up founder affirmed the challenging market environment – cash flow issues, funding availability and low customer demand were cited as top challenges in 2023.
