The government imposes angel tax on Indian startups securing funding at valuations exceeding the company’s fair market value. They consider this valuation difference as income and tax it accordingly.
The government levies a tax on the difference between what investors pay for a startup and its perceived fair value. The government introduced this tax in 2012 to curb potential money laundering activities.
How does it work?
- An investor provides funds to a startup in exchange for equity.
- If the investment amount exceeds the fair market value of the shares, the government considers the extra amount as income and taxes it at 30.9%.
- This additional tax burden creates financial pressure on startups, hindering their growth and development.
Impact of angel tax on startups
It has discouraged investors from funding early-stage startups. Many potential investors shy away from complex tax procedures and the risk of facing tax scrutiny. This has limited the availability of funding for startups, hindering their ability to innovate and scale.
Recognizing the negative impact of angel tax, the Government of India has taken steps to address this issue. In the Union Budget 2024, the government announced the complete abolition of the angel tax. The move will boost investor confidence and create a more conducive environment for startups.
The removal of angel tax is a significant step forward for the Indian startup ecosystem. It will encourage more angel investors to support early-stage ventures, leading to increased funding, job creation, and economic growth.
While the abolition of the angel tax is a positive development, startups still face other challenges such as access to markets, talent acquisition, and regulatory hurdles. Addressing these issues will be important for the long-term success of the Indian startup ecosystem.
Also read: Positive and Negative Impacts of Budget 2024
