The End of Angel Tax and Key Takeaways from Budget 2024
The 2024 budget of India, like every year, was met with a fair share of criticism. Amidst the controversies, there are several important decisions in the budget that business owners and those in the startup ecosystem need to understand. These decisions could have a significant impact on how businesses operate and grow in the coming years.?
Finance Minister Nirmala Sitharaman shared key budget updates that could greatly affect the future of Indian businesses. This blog is tailored for business owners who want to understand how the new budget will affect their ventures. We will break down the key budget 2024 highlights and explain the rationale behind these decisions, along with their potential effects on the Indian business landscape. Here are some of the most important takeaways from the Union Budget 2024 - 25 for startups and investors:
Abolishing of Angel Tax
One of the most important highlights of the 2024 budget was the abolishment of the “Angel Tax”. Here’s what it means:
Angel tax was a tax that Indian startups had to pay on the money they received from investors when the investment was seen as higher than the startup’s fair market value. This tax was paid by startups because the excess amount was treated as "income" by the government, even though it was an investment. It was called "angel tax" because it mainly affected angel investors—individuals who invest early in startups. Before the 2024 budget, this tax burdened startups by making it expensive to raise funds from investors.
2. Reasons for Abolishing Angel Tax
Finance Minister Nirmala Sitharaman decided to abolish the angel tax to make it easier for startups to raise funds without the extra tax burden. The Department for Promotion of Industry and Internal Trade (DPIIT) recommended this repeal to help boost capital formation in India, encouraging more investments in startups. The expected benefits include more growth opportunities for startups, as they can now attract investments more easily. Experts and industry leaders have welcomed the move, seeing it as a positive step that will strengthen India's startup ecosystem.
Rs 1,000 crore fund for space tech startups
The 2024 budget announced a 1000 crore venture capital fund for space tech startups, aiming to boost growth and interest in India’s space industry. This fund could help space tech startups access the capital they need to develop new technologies and compete globally.?
However, the details of how the funds will be invested, or which entity will manage this, were not clearly outlined in the budget. Despite this vagueness, the announcement shows the government’s strong intention to promote and strengthen India’s position in the global space tech ecosystem.
Support for MSMEs
The Budget 2024 had several important highlights for MSMEs (Micro, Small, and Medium Enterprises). They may be divided into the following subheads:?
The budget proposes the establishment of ecommerce export hubs to help MSMEs access international markets more easily. These hubs will act as centralized points where MSMEs can manage their exports, making it simpler for them to reach global customers. The timeline for setting up these hubs hasn’t been clearly outlined, but the initiative is expected to boost MSME growth by opening up new revenue streams and increasing their global presence.
2. Credit Guarantee Scheme
The budget introduces a new credit guarantee scheme to support MSMEs in obtaining term loans. This scheme will help MSMEs secure loans for purchasing machinery and equipment without needing to provide collateral or a third-party guarantee. By reducing the risk for lenders, this scheme aims to make it easier for MSMEs to get the funding they need to expand their operations and invest in new technologies.
3. New Assessment Model for Credit
A new credit assessment model is being introduced, where public sector banks will develop their own in-house capabilities to assess MSMEs for credit, rather than relying on external agencies. This model aims to provide a more accurate and tailored assessment of MSMEs’ creditworthiness, making it easier for these businesses to secure loans. The expected benefits include quicker access to credit and more favorable loan terms, helping MSMEs grow and thrive.
Suggested read: Startup Benefits in India You Can Avail in 2024
Simplification of Rules and Recognition for Foreign Direct Investments (FDIs)
The 2024 budget aims to simplify rules and recognition for Foreign Direct Investments (FDIs) to make it easier for foreign investors to put money into Indian businesses. These changes are expected to facilitate a smoother inflow of foreign investments, encouraging more international capital to flow into the country.?
One key benefit is the promotion of using the Indian Rupee (INR) for international transactions, which could strengthen the currency and make India a more attractive field for global investors.
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Extension of Section 68 Exemption to GIFT IFSC Funds
Section 68 of the Income Tax Act taxes unexplained cash credits within a company, which was previously catered to under the Angel Tax. The 2024 budget extends an exemption from this tax to funds in the GIFT IFSC (Gujarat International Finance Tec-City International Financial Services Centre). This means GIFT IFSC funds won’t be taxed on unexplained credits, making it easier to attract investments.?
For investors, this provides a more favorable environment to invest in GIFT IFSC funds. Also, the introduction of Variable Capital Company (VCC) structures in GIFT IFSC offers a globally recognized, flexible investment vehicle. This is expected to help with improving investor confidence.
Removal of Equalisation Levy for E-commerce Startups
The Equalisation Levy (2016) was a tax on digital transactions by e-commerce operators who did not have a permanent establishment in India. The 2024 budget removed this levy to align with the global BEPS 2.0 (Base Erosion and Profit Shifting) framework, specifically Pillar One and Pillar Two, which aim to create a fairer international tax system.?
The removal of this levy will reduce the tax burden on e-commerce startups, making it easier for them to operate and compete. This change is expected to attract more global e-commerce businesses to India which will in turn benefit India’s overall digital economy.
Taxation Changes
A key aspect of the 2024 budget was the introduction of taxation and regulatory changes aimed at simplifying bureaucratic processes. This focus on reducing complexity is intended to create a more attractive and supportive environment for new startups.
The 2024 budget introduced a simplified approach to capital gains taxation, aiming to make the tax process easier for both investors and businesses. This change is expected to reduce confusion and compliance burdens, encouraging more people to invest. The simplification could lead to a more active investment landscape, as investors might be more willing to engage in buying and selling assets without worrying about complex tax rules.
2. Reduction of Tax Deduction at Source (TDS) on E-commerce
The budget reduced the TDS on ecommerce transactions from 1% to 0.1%. This cut significantly lowers the tax burden on e-commerce startups and businesses, freeing up more cash flow for growth and operations. The reduction is expected to boost e-commerce activities, making it easier for businesses to operate online and encouraging more entrepreneurs to enter the market.
3. Corporate Tax Rate Reduction for Foreign Companies
The corporate tax rate for foreign companies operating in India has been reduced from 40% to 35% in the 2024 budget. This reduction makes India a more conducive destination for foreign companies, potentially increasing foreign investments.?
4. Unlisted Debentures and Bonds to be Taxed at Slab Rates
With this change, unlisted debentures and bonds will now be taxed at the investor’s income tax slab rate, rather than at a flat rate. This means that investors in higher tax brackets may pay more tax on these investments, making them potentially less attractive. This aligns the taxation of these instruments with other forms of income, creating a more consistent tax system.
5. Buybacks to be Taxed as Dividend Income
The budget introduced a new rule where buybacks will be taxed as dividend income in the hands of shareholders. Previously, companies paid a buyback tax, but now the tax burden shifts to shareholders, who will be taxed at their personal income tax rate. This change may reduce the attractiveness of buybacks as a method for companies to return capital to shareholders, impacting how companies manage their finances.
6. Taxation of Unlisted Equities on Par with Listed Equities
Budget 2024 has aligned the taxation of unlisted equities with that of listed equities, meaning both will now be taxed under similar rules. This change simplifies the tax system and provides a level playing field for investors in both listed and unlisted shares. While it may increase the tax burden on unlisted equities, it also offers more clarity and consistency in how these investments are taxed.
Suggested read: Guide to Tax Benefits for Startups in India
Conclusion
The Union Budget 2024 - 25 has proposed changes that present a range of nuanced opportunities and challenges for various business sectors. While some of the new measures, such as the abolition of angel tax and the introduction of a venture capital fund for space tech, are promising for startups and investors, criticisms are valid. Not all changes will benefit every business owner, and certain key industries may feel overlooked.?
There is a perception that the "Make in India" initiative might have lost some focus, as not all industries receive the support they need. Nevertheless, the broader economic context cannot be ignored. Despite the controversies, Finance Minister Nirmala Sitharaman's approach highlights India's resilience as one of the most stable and promising economies at time where first world countries are in the middle of recession.?