Budget 2024 and Startup ecosystem

Union Budget 2024 has boosted the morale of startup community by making three changes:

1.??? Abolition of Angel Tax for all

2.??? Setting up Rs. 1000 cr venture capital fund for space tech startups

3.??? Reducing long term capital gain tax from 20% to 12.5%

?Let us go a little deeper to understand the nuances of these changes:

A.?? Angel Tax:

(a)? Angel Tax was an income tax on premium of any investment in startups. Investors were angel investors mainly HNIs. They were investing in early-stage startups at the stage of seed and pre-seed stage.? This tax was introduced in the budget of 2012 for curbing the money laundering. But throughout its journey, this tax acted as deterrence for genuine early-stage investors.

(b)? Angel tax was being levied under Section 56(2)(viib) of Income Tax Act. Any amount received in excess of fair market value was assumed to be premium and was taxed at rate approximately 31%.

(c)?? This tax was applicable for domestic investors as well as foreign investors.

(d)? In some case, the angel tax and late fees as claimed in the notices of income tax department was even higher than the entire investment.

(e)?? There was hardly any exemption. Even the DPIIT recognized startups were further required to be certified by the Inter-Ministerial Board of government. Success rate of exemption application was even around 1%.

(f)??? Even after abolition of Angel Tax in Budget 2024, there is still grey area of status of pending income tax investigations. Hope the government will soon scrap all those notices.

?Abolition of Angel Tax will ?boost India’s startup ecosystem, driving ?innovation, streamline operations, and sustainable growth, enhancing India’s position as a global leader in technology and innovation.

B.?? Space Tech related Venture Capital Fund

???? i.??????? The government announced setting up of ?Rs.1000 crore venture capital fund dedicated to the space economy.

??? ii.??????? The fund is intended to accelerate the growth of India's Spacetech startup ecosystem, facilitating the rise of prominent players and fostering innovation within the space sector.

? iii.??????? Focus will be on domestic manufacturing and creating application test beds for space tech startups.

?? iv.??????? This fund will be big booster for startups in seed and pre-seed stage.

C.?? Lowering of Long term capital gains tax:

·??????? Long term capital gains will now be uniformly applied at 12.5% for all financial assets, down from the previous 20% for unlisted company stocks, making startup investments more appealing.

·??????? The reduction in long term capital gains tax for unlisted securities is expected to encourage domestic investors to allocate more capital to startups, enhancing the domestic funding.

D.?? ?Exempting and lowering customs duty on minerals like lithium, copper and other critical minerals will have positive impact on startups and industries in nuclear, space and renewable energy.

Overall, the Budget, 2024 will have long term positive impact for growth of startups.

In case, ?you are part of ?startups ecosystem, you need any support or have any query regarding fund raising, compliances, valuation and taxation, you may like to connect with us.

Abhiinarayan Mishra FCA, FCS, LL.B, IP, RV; Partner, KPAM & Associates, Chartered Accountants, New Delhi ; +91 9990013755; +91 9910744992; [email protected]; [email protected]