DPIIT has recommended that the government removes the Angel Tax, ahead of the union budget. (Representative Image)
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Angel tax refers to the income tax that the government levies on funding raised by unlisted companies, or startups, if their valuation exceeds the company's fair market value.
Why is it called Angel Tax?
The tax is so called because it mostly impacts angel investors or investors who put their money in start-ups or new ventures. It was first introduced in the 2012 Union Budget by the then finance minister Pranab Mukherjee under the UPA-II regime to deter money laundering.
In 2018, however the NDA government issued a notification under Section 56 of the Income Tax Act, exempting startups in cases where the total investment including funding from angel investors did not exceed Rs 10 crore.
The startups were required to get approval from an inter- ministerial board as well an a certificate from a merchant banker to avail the exemption.
Why is DPIIT against Angel Tax?
The Economic Times reports that the Department for Promotion of Industry and Internal Trade (DPIIT) has made a recommendation to remove the Angel Tax after consulting with the start-up sector.
DPIIT secretary Rajesh Kumar Singh confirmed on July 4 that the department has called for the removal of Angel tax ahead of the 2024-25 budget to be presented by finance minister Nirmala Sitharaman.
“Ultimately, the integrated view will be taken by the finance ministry on Angel Tax. It’s just an input from our side. We have done it several times,” Singh said, adding that the department has passed on the written inputs from industry associations to the finance ministry," ET quoted Singh.
The start-up sector has been lobbying for a long time for the removal of the tax.
Start-up sector faces funding crunch
Even as funding improved after a dry spell, the ET reported on July 5, that fundraising by startups fell by 3.8% to about $5.1 billion in the first half of 2024, compared with $5.3 billion in the same period in 2023.
The ET article further reports that lately Indian start-ups have been facing valuation markdowns. Unicorns such as Byju’s, ShareChat among companies facing the brunt. Moreover, many had to raise have rounds of funding at lower valuation than the earlier ones.