Angel tax may affect investments in start-ups

Angel tax was introduced mainly to curb money laundering. But with the new announcement, foreign investors’ funds will now be subject to angel tax. 

Published: 03rd February 2023 10:07 AM  |   Last Updated: 03rd February 2023 10:07 AM   |  A+A-

Tax, Income Tax, GST, Capital Gains Tax, Windfall Tax

Image for illustrative purposes only.

Express News Service

BENGALURU:  The start-up ecosystem is already facing a severe funding winter, and the budget has included non-residents investors under the ambit of angel tax, which will be detrimental to funding.
Though the budget has allocated enough funds under the Startup India Initiative, and also extended tax holiday for start-ups by another three years, the new provision will make it harder for foreign investors who invest in Indian start-ups.

Tiger Global, SoftBank, Sequoia Capital among other investors have invested in many start-ups in India.
Vishwas Patel, Executive Director, Infibeam Avenues Ltd and Chairman, Payment Council of India said the union budget hasn’t attempted to fix the anomalies in start-up regulations, conditions around the angel tax issue that requires to be simplified and tax holidays or lower tax structure for start-ups has been left unresolved.

“Even the strong demand from the start-up community for taxing Employee ESOPs only at the time of selling the share has not been fulfilled. The government should consider expanding the scope of this relief to include more start-ups, irrespective of whether the start-up is registered under the Department for Promotion of Industry and Internal Trade (DPIIT) or not. All start-ups should be treated equitably,” he said.

Angel tax was introduced in 2012, and it is the tax that unlisted companies are liable to pay on the capital they raise. Now, this tax applies to non-resident investors. Yamini Bhat, Co-Founder & CEO - Vymo, said, “Budget for start-ups has been a non-event. Skill building in IT to keep pace with the growth and dearth of talent, capital gains benefits extension to ESOPs, stronger / longer tax benefits for companies building in India to serve the global market etc. - all these are missed opportunities that could have accelerated the current tech boom.” 

Angel tax was introduced mainly to curb money laundering. But with the new announcement, foreign investors’ funds will now be subject to angel tax. In India, a majority of funds have been raised from non-resident investors. Also, for many years now, start-ups have been demanding tax reforms on ESOPs as it would provide a huge relief to them.

They wanted the Centre to take steps that will promote Indian start-ups. As of December 2022, there were over 1,800 funded start-ups in India and about 1,021 funding rounds closed last year. As per a PwC report, funding for Indian start-ups in CY22 was nearly $24 billion, a drop of 33% as against to CY21. Only 21 start-ups attained unicorn status in 2022.


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