Relief for Startups? Commerce Ministry Recommends Abolishing Angel Tax

Startups in India
Preeti Bali / 7:29 am / July 8, 2024

The upcoming budget might bring good news for India’s startup ecosystem. The Commerce Ministry, led by Piyush Goyal, has proposed scrapping the controversial “angel tax.”

What is Angel Tax?

Angel tax, levied under Section 56(2)(viib) of the Income Tax Act, applies a 30% tax on investments received by startups if the amount exceeds the fair market value of the company. This regulation was introduced in 2012 to curb potential money laundering activities.

Calls for Removal

The startup community has long criticized the angel tax, arguing it hinders the growth of entrepreneurship and innovation. Angel investors, venture capitalists, and activists have consistently raised concerns about the tax’s negative impact.

A Step Towards Relief

The Commerce Ministry’s recommendation marks a significant step towards abolishing the angel tax. However, the final decision lies with the Finance Ministry, headed by Rajesh Kumar Singh.

Hope for the Future

Angel investors are optimistic about the recommendation. Many, like one prolific investor with a portfolio of over 60 startups, believe the Finance Ministry will provide complete relief.

Past Attempts at Relaxation

In September 2023, the government offered some relief by exempting DPIIT-registered startups from the 30% tax. This move reportedly benefited over 80,000 startups.

Lingering Concerns

Despite the exemption, several DPIIT-approved startups and their investors have received Income Tax notices in the past six months. These notices questioned fair market valuation, investor details, and other financial information.

A Positive Sign

The Commerce Ministry’s recommendation offers a positive outlook for the startup ecosystem. Legal challenges against the angel tax have also strengthened the case for its removal.

The Final Decision

The Finance Ministry holds the power to grant the long-awaited relief to startups and the investor community. It remains to be seen if they will take action based on the Commerce Ministry’s recommendation.

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