One of the most feared angel taxes has been abolished. Industry experts are abuzz with this news. Let’s delve deeper into what it means for startups and investors at large.
PC: Sarkaritel.com
So, what is the angel tax, you ask? Basically, that is a tax on the capital that a non-listed company raises by issuance of its shares at what is perceived to be more than its present market value. This was like a constant thorn in the side of several startups, particularly those trying to attract foreign investment. Guess what? The Department for Promotion of Industry and Internal Trade has just announced the abolishment, and the startup ecosystem is ecstatic.
What’s the big deal? The funding winter, which set in during 2022, has been rather inclement. Private equity and venture capital investments in India dropped dramatically from $62 billion in 2022 to $39 billion in 2023. The angel tax was compounding this decline as it applied to foreign investors too and was deterring them from investing in Indian startups.
It was aptly summed up by Razorpay’s CFO, Arpit Chug, who said that after all, the contribution the startup ecosystem has made towards India’s GDP has been noteworthy; it has truly put India on the global map. Abolition of angel tax is huge encouragement to startup investments, reducing the tax burden and paving the way for India to become the global innovation hub.
Industry had been demanding the rationalization of angel tax by scrapping the Section 56(2)(viib) of Income Tax Act, as it was turning out to be one of the gigantic hurdles in the way of capital formation in the startup sector. Now, with this section being scrapped, venture capitalists and FPIs would be more forthcoming in terms of investments.
Numbers are already looking promising. In the first half of 2024, Indian tech startups raised $4.1 billion, up marginally from the $3.96 billion raised in the second half of 2023. Based on Tracxn—a leading market intelligence platform—against this run rate, India would continue to remain the fourth-highest funded country globally in the tech startup landscape.
According to Raj K Gopalakrishnan, Co-Founder and CEO of KOGO, exemption from angel tax is going to clear the funding winter in India by allowing homegrown startups to get funded both by domestic and foreign investments and thereby generate jobs.
Another such view was reflected by Khadim Batti, Co-Founder and CEO, Whatfix. He referred to the abolition of angel tax as a much-needed step, one that is of critical nature and can grant some relief to beleaguered startups facing this funding winter. He further added that simplification of foreign direct investment and overseas investment rules, and incentivizing the Indian rupee as a mode of transaction globally, are other prominent areas which need to be addressed while rationalizing policies to build further trust amongst investors.
There you go! The abolition of angel tax is game-changing in the Indian startup ecosystem. It is going to ease the funding crunch and help attract more foreign investment; it is finally going to give India a sure footing in the global innovation hub. Exciting times ahead, folks! Stay tuned for more updates and keep hustling.
