On Tuesday (23rd July), Finance Minister Nirmala Sitharaman presented the Union Budget for AY 2025-26 introducing new slab rates and also increasing the standard deduction rate which will benefit around 4 crore salaried employees. Meanwhile, Sitharaman also imposed relief on Capital Gains benefitting the middle-class community and abolishing the angel tax to support the Indian start-up ecosystem.
Presenting her seventh consecutive Budget in Parliament, Sitharaman said that the Indian startup ecosystem has always been buzzing with innovation and ambition, but Angel Tax has often sparked debate. “To bolster the Indian start-up eco-system, boost the entrepreneurial spirit, and support innovation, I propose to abolish the so-called angel tax for all classes of investors,” the finance minister said.
Monetary limit for filing Tax appeals increased to Rs 60 lacs for ITAT, Rs 2 crores for High Courts and Rs 5 crores for Supreme Court. I propose to abolish the Angel tax abolished for all classes of investors. Corporate tax rate to be reduced on foreign companies from 40 to 35… pic.twitter.com/q0RGlR44GI
— DD News (@DDNewslive) July 23, 2024
In the interim budget presented in February, the government had proposed extending tax breaks for startups and investments facilitated by sovereign wealth or pension funds for another year, until March 2025.
The “Angel Tax” is a charge imposed on the capital raised by unlisted firms through the issuance of shares to investors. This tax targets the premium paid by investors over the fair market value of shares, which is frequently categorized as “income from other sources” and taxed accordingly.
The Finance Act of 2012 made this substantial alteration to the Income Tax Act by adopting Section 56(2)(viib). This section focused on investments received by unlisted Indian enterprises. Under this clause, any investment valued beyond its fair market value is regarded as income and liable to taxation.
Congress’ P Chidambaram took cognizance of the event and targeted the govt for taking so long to abolish the so-called tax. He said that the Congress had pleaded for the abolition of the angel tax and finally the Finance Minister announced it today. “I was pleased to hear that the FM will abolish the Angel Tax. Congress has pleaded for the abolition for many years and most recently in the Congress Manifesto on page 31,” he said.
Ironically, it was Congress who had made changes in the Income Tax Act to introduce the Angel Tax. The concept of an angel tax was first proposed in the 2012 Union Budget by the then-Finance Minister Pranab Mukherjee. Later, in July 2012, Chidambaram who ‘pleaded’ to abolish the angel tax became the Finance Minster. The major goal of the angel tax imposition was to prevent money laundering through investing in startups and prosecuting fraudulent organizations after such cases emerged.
Several startups in the recent past registered unease regarding the angel tax. They described the tax as excessively unfriendly and unjust. They also noted that angel tax made a determination of the market value of any startup difficult. Some of the startups are said to have received angel tax notices where the amount of tax and late fees exceeded the initial financing amount.
At the peak of the angel tax controversy in 2019, a LocalCircles poll revealed that more than 73% of businesses in India that obtained money ranging from Rs 50 lakh to Rs 2 crore received angel tax notices from the income tax department.
In the 2019 Union Budget then, the government modified the angel tax requirements by exempting DPIIT-registered firms from the clause. However, the fine print indicated that it was not a general exemption for all such startups but was only applicable to those certified by the Inter-Ministerial Board (IMB).
Apart from Chidambaram, Congress’ Shashi Tharoor also praised the move that suggested the abolition of the angel tax. He also claimed that he had suggested the move to former Finance Minister Arun Jaitley. “I welcome only one provision which is the abolition of tax on angel investors. I had recommended it to Arun Jaitley ji 5 years ago. The overall budget was underwhelming,” he said to ANI.
An intentional attempt of abolition of Angel Tax has been made to position India as a global center of innovation. It is believed that the action is in line with India’s grandiose plan to build a $10 trillion economy by 2030, in which startups are expected to play a significant role. The present worth of the Indian startup ecosystem, which is projected to exceed $3 trillion, would rise dramatically as a result.
Additionally, India’s current ranking of 40th in the global innovation index would be strengthened. This would, in the long run, lessen reliance on technology and strengthen economic sovereignty while also promoting a more risk capital-friendly environment and, consequently, a higher likelihood of domestically produced global tech giants.
