TAG: GS 3: ECONOMY
THE CONTEXT: Union Finance Minister while presenting the Union Budget in Parliament, announced scrapping the contentious Angel Tax on foreign investments received by such enterprises, a development that should ease the financing woes of startups.
EXPLANATION:
- This decision aims to ease the financial challenges faced by startups, especially in light of the recent funding downturn.
Impact on the Startup Ecosystem
- Elimination of angel tax is expected to strengthen the Indian startup ecosystem.
- The government aims to strengthen entrepreneurial spirit and encourage innovation by eliminating this tax.
- The move is seen as an important step to help start-ups struggling to raise funds in the current economic climate.
- There has been a sharp decline in start-up funding over the past year.
- Funding will drop 60% to $10 billion by 2023, according to the Indian Tech Startup Funding Report 2023 by Inc42.
- This downturn follows a 40% decline in 2022, highlighting the pressing need for policy interventions to stimulate investment.
- The abolition of the Angel Tax is expected to ease these funding woes, making it more attractive for foreign investors to support Indian startups.
Angel Tax
- The Angel Tax was introduced in 2012 by the UPA government to curb potential money laundering through investments in overvalued unlisted firms.
- However, this tax inadvertently impacted startups negatively, as their valuations are based on future potential rather than current worth.
- This led to significant tax liabilities during their early funding stages, hindering their growth.
- Several industry players and stakeholders opposed the Angel Tax, arguing that it deterred foreign investment and stifled startup growth.
- Despite this opposition, the government continued to levy the tax.
- Amendments to the income tax rules in September 2023 aimed to create parity between domestic and foreign investors, but the core issues remained unresolved.
Government’s Assurance and Industry Response
- Revenue Secretary addressed concerns about potential money laundering following the abolition of the Angel Tax.
- He emphasized that existing provisions in the Income Tax Act and the Prevention of Money Laundering Act (PMLA) are sufficient to track the source of funds and prevent illicit activities.
- This reassurance is crucial in maintaining regulatory oversight while promoting investment.
- The industry has welcomed the abolition of the Angel Tax.
- Vice President & Head of Public Policy at NASSCOM expressed optimism that past investments not under dispute would benefit from a more favorable tax outlook.
- Partner at Auxano Capital highlighted that this decision would halt fresh litigation and free up funds previously tied up in deposits due to tax disputes.
Broader Implications for India’s Economy
- Enhancing Investment Climate
- By scrapping the Angel Tax, the government aims to create a more favorable investment climate for startups.
- This measure is part of a broader strategy to position India as a hub for innovation and entrepreneurship.
- It reflects the government’s commitment to supporting new businesses and driving economic growth.
- Aligning with Global Standards
- The abolition of the Angel Tax aligns India’s investment policies with global standards, making it more competitive and attractive to international investors.
- This alignment is crucial for integrating India’s startup ecosystem into the global market and leveraging international capital for domestic growth.