ABOLITION OF ANGEL TAX

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.

SOURCE: https://www.thehindu.com/business/budget/union-budget-2024-nirmala-sitharaman-scraps-angel-tax-on-foreign-investments-amid-startup-funding-winter/article68437487.ece/amp/

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