Budget 2024: DPIIT recommends removal of Angel Tax

DPIIT secretary R.K. Singh said on Thursday at a media briefing that a proposal received from the industry has been forwarded to the finance ministry suggesting the removal of the tax. 

“Based on consultations with start-ups, we have recommended the removal of the angel tax," Singh said. "The decision is to be taken by the ministry of finance; we have provided our inputs. It was not raised during the pre-budget consultations."

Early stage entrepreneurs are happy about the possibility of the tax going away. “This move will be a game-changer for both early-stage startups and investors," said Bharat Joshi, co-founder of Bengaluru-based fintech startup VuNet Systems, adding that the move could foster a more conducive and positive environment for innovation and growth, and unlock greater opportunities for entrepreneurs. 

Utkarsh Sinha, managing director of boutique investment banking firm Bexley Advisors, said that removal of angel tax would enhance ease of doing business and attract additional capital to India. “This move can help spur many sectors actively seeking early-stage capital," he said.

What is angel tax?

Section 56(2)(viib) of the Income-tax Act, commonly referred to as the ‘angel tax’, was introduced in 2012 to prevent unaccounted money from being used to invest in shares of private companies. 

The tax, levied at a rate of 30.6%, comes into effect when an unlisted company issues shares to an Indian investor at a price above what the tax department says is its fair market value.

According to Section 56(2)(viib) of the Income Tax Act, when an unlisted company, like a start-up, gets equity investment from a resident of India for issue of shares that exceed their face value, the excess amount is subject to income tax under the head ‘income from other sources’ for that financial year.

Also read: Decoding the valuation rules for angel tax on startups

Exemptions introduced

In 2019, the government introduced an exemption for investors putting in money into startups registered with the DPIIT, so long as the aggregate of the paid-up capital and share premium of the startup after issuing shares did not exceed ₹25 crore. Also, companies with turnover higher than ₹100 crore were not considered startups.

While earlier the tax was applied only to investments by resident investors, the Finance Act 2023 amended Section 56(2)(viib) of the Income-tax Act to extend angel tax to non-resident investors as well. The exemption from tax, similar to resident investors, was introduced for foreign investors from 1 April 2024. 

As per Startup India website, there are 134,251 startups registered with DPIIT till date.

“The logic behind application of angel tax to NRIs had been cited as to prevent generation and circulation of unaccounted money through share premium received from NRI investors in a closely held company in excess of its fair market value," said Vivek Jalan, partner at Tax Connect Advisory Services LLP, a multi-disciplinary consulting firm.

"However, it is very difficult to convince field officers about the valuation of start-ups or even new enterprises with good business prospects. This would have impacted the growth of start-ups and new enterprises in India, which would have gone against the government’s broad focus," Jalan said.

Also read: Silver lining for Indian startups as monthly funding shoots highest since June

Other moves by the DPIIT

In the media interaction, the DPIIT secretary said the department has also suggested visa relaxations for the beneficiaries of non-PLI schemes.

“We have already streamlined the process for PLI beneficiaries and are trying to extend it to other non-PLI beneficiaries operating in the same strategic sectors, ensuring uniformity," Singh said. “If one group is receiving subsidies and visa clearance, others should also receive a streamlined process, even if they are not receiving subsidies." 

The official further said that a final decision has not been taken yet. "This is a subject under the ministry of home affairs (MHA)," he said.

In addition, the government is considering changing the base year of the wholesale price index (WPI).

“Other elements, including the consumer price index (CPI) and various other indicators are being handled by the ministry of statistics and programme implementation (MoSPI). I expect an update on the base year of the WPI, but whether it will be a single base year, or multiple base years is not yet finalized," he said, pointing out that some developed economies use multiple base years for different types of indexes. 

Also read: Wholesale inflation rises to 15-month high in May

"It's an ongoing process, and the producer price index (PPI) could be announced soon," Singh said, adding that procedural work remains, which the National Statistical Commission has to review first. "From our side, the model is final," he said.

A change in the PPI base year is required to accurately reflect current economic conditions, improve the index's accuracy by updating prices and goods, enhance comparability with international standards, capture structural economic changes, and support informed policy decisions.