Nirmala Sitharman takes VCs by surprise, abolishes Angel Tax

Union Budget 2024: Finance Minister Nirmala Sitharaman took India’s startup ecosystem and venture capitalists by surprise when she announced complete abolition of draconian Angel tax. 

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"To bolster India startup ecosystem, to boost entrepreneurial spirit and support innovation, I propose abolishing angel tax for all classes of investors," Finance Minister said in her seventh consecutive budget speech. 

Top industry voices and leing venture capitalists have shared ir sense of relief with decision as proving y to define fair market value of ir shares. 

Talking about relief in budget to startups in country, Anil Agarwal, Chairman, Vedanta remarked, “ abolition of angel tax will give a big boost to our startups and young entrepreneurs who are job creators of future.” 

What was Angel Tax and why did startups have to pay it? 

Angel Tax is a tax on investment me by an individual or a group of individuals (called angel investors) into a startup. It was introduced by Indian government in 2012 to curb money laundering. idea was to ensure that investments me in startups were legitimate and not a way to convert black money into white money. 

When a startup receives an investment, government evaluates wher amount paid by investor is higher than fair market value of startup’s shares. If investment is deemed to be higher than this fair market value, excess amount is taxed as income for startup.

Boost to startup ecosystem

Dilip Chenoy, Chairperson of Bharat Web3 Association believes that abolishing angel tax for all classes of investors will work towards boosting Indian startup ecosystem. 

India's startup industry has faced difficulties in accessing growth capital recently. According to data from Venture Intelligence, private equity and venture capital investments in Indian companies dropped by 24 per cent in first half of 2024 compared to same period in 2023.

“ abolishment of angel investing taxes is a landmark decision, set to boost startup funding and entrepreneurship across India,” said Harsh Punjabee, CEO of SMEST Capital. 

decision by government will also bring down time spent on tax-related litigations. 

Open Network for Digital Commerce (ONDC) also mentioned that abolition of angel tax will provide a substantial boost to domestic startups.

Sharing his personal bitter experience with angel tax, Ashish Singhal, Co-founder, Lemonn and CoinSwitch, said, “As a founder and angel investor, I’m thrilled that Angel Tax has been abolished. This will significantly bolster entrepreneurial ecosystem in India.