While India’s startup ecosystem debates the reintroduced Angel Tax, Anurag Jain, secretary of the Department for Promotion of Industry and Internal Trade (DPIIT), says the Angel Tax will not apply to Indian startups.
According to the government official, the tax will help level the playing field for domestic businesses, which is now skewed in favor of international companies.
“There is no Angel Tax on startup capital. Allow me to be clear. (Section) 56.2 (VII B) previously had two provisions. The preferential treatment of foreign players was one example. Preferential treatment has been abolished. But there is no change for startups,” Anurag Jain, secretary of DPIIT, said at a news conference on Thursday (February 2).
Only DPIIT-recognized startups, according to Jain, will be exempt from Angel Tax.
The DPIIT secretary further stated that adequate provisions were in place to ensure that Angel Tax did not apply to startups. “We’re all aware that people invest in startups because of their potential. It may not be valued today. But they know it will be worth this in the long run, so they invest. There is a stipulation that this is not available to startups,” Jain explained.
What Exactly Is Angel Tax?
The Angel Tax was reintroduced by the government in the Finance Bill 2023, which was introduced immediately after Finance Minister Nirmala Sitharaman presented the Union Budget 2023-24. The tax was first imposed by the government in 2012 in order to prevent money laundering and roundtripping through investments.
The move has raised concerns among investors and startup founders that it will exacerbate the current funding crisis, especially given that investments in Indian startups have dropped to $25 billion in 2022 from $44 billion in 2021.
The tax applies to any private business entity, but it was first applied to startups in 2016. The Angel Tax, which is paid at 30.9% on net investments beyond fair market value, is placed on startups. Despite the fact that the tax was only in effect for a year, many startups were assessed for Angel Tax.
The action caused widespread fear in the ecosystem because most people did not have the funds to pay the tax bill and hence risked being prosecuted. Regardless of who pays the tax, it will eventually deplete the startup’s funds.
Because the majority of Indian startup funding comes from offshore investors, if the Angel Tax is implemented as is, investors will tighten their purse strings and ask startups to redomicile in order to invest easily.
In the face of increased taxation and disclosure pressures from the Angel Tax, the government’s move to accelerate reverse flipping would be rendered meaningless.