India gets rid of the ‘Angel tax’—a devil for startups

India retracts angel tax, the sword of Damocles for its startup ecosystem, after introducing it seven years ago.

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In a breather to Indian startups, country’s finance ministry announced Friday that all the startups that are listed with the Department for Promotion of Industry and Internal Trade (DPIIT) will not have to pay ‘angel tax’—a seven-year-old provision that was originally introduced to curb money laundering.

“Section 56 (2)(vii b) of the Income Tax Act shall not apply to startups registered with the commerce ministry,” India’s Finance Minister Nirmala Sitharaman, said. According to a KPMG report in 2018, there were around 50,000 startups in India, of which more than 24,000 startups are currently recognized by DPIIT. Only these startups will benefit from the new order.

India levies an angel tax of 30% on private companies when they raise money at a rate that is higher than the “fair market valuation”. Angel tax has been a bone of contention for startups and early-stage investors for some time now as they have registered their protest to the government multiple times. Many startups have received notices from tax authorities asking to pay penalty, which in some cases was higher than the money raised by the company.

During the budget announcement in July, Sitharaman had said startups and their investors, who file requisite declarations, will not be subjected to any kind of scrutiny in respect of valuations of share premiums.

On Friday, the finance minister further announced that a dedicated cell will be set up under the Central Board for Direct Taxes (CBDT) that will address all the tax-related problems of startups.

Angel tax not only put additional stress on cash-strapped startups, it also dissuaded early-stage investors from putting in their money, as they had to reveal their total assets and income tax returns to the government. With the recent order investors can put in their money without worrying about revealing such information.

According to a report by research firm Tracxn, funding in young Indian startups fell by 5% to around USD 10.5 billion in 2018, compared to USD 11.2 billion in the previous year.