Impact of Abolition of Angel Tax on Promotion of Start-up Ecosystem In Bharat

????? In the recent Union Budget 2024-2025 , the abolition of Angel Tax for all the investor classes are being seen as strengthening of the Start-up Ecosystem of Bharat. The abolition of Angel Tax has been a long awaited demand from the Startups and Investors .

?? ?As we all know that any Startup has to struggle a lot regarding the fund in their early stage venture. Since in the beginning the Startup don’t have much tangible assets to offer as a collateral in return to the Angel Investors investing in their venture except the exchange of their equity. It’s the Angel Investor who help the Startup to solve their fund issues when? they are struggling in the market to establish their venture.

??? As per the Income Tax Act of 1961 Section 56(2)(viib) and Finance Act, 2012 , in the IT Act, all the Startup Firms which are unlisted companies and their shares are not available for buying on the stock market , if they receives funding from an angel investor must contribute a certain amount? to the Government . If the total investment value exceeds the company’s Fair Market Value (FMV) than this extra income over the FMV is categorized as “income from other sources” and that tax which is imposed is called the Angel Tax the rate of which is around 30% which is a very significant amount for any Startup Venture.

? The primary objective behind the imposition of this Angel Tax was to protect the case of money laundering in the name of investment in Startups and increasing the transactional transparency to check the Black Money. However their were some major drawbacks of Angel Tax . Among these drawbacks one of the major drawback was that the Angel Tax was applied only to those Startups which were funded by the resident Indians. Second drawback was that any startup if earn from the investment from any venture capital and non resident investors were not eligible for the deduction of the Angel Tax and last but not the least the Startups has to spent a huge amount from their total earnings in the form of tax as Angel Tax requires them to share a significant part of their investment.

????? If we analyze in totality the Angel Tax was more a conflict problem than a money problem. In the ease of doing business the Angel Tax imposition was a big and serious issue. The Startup and Investors? has to ?carry on so many paper formalities , bear the extreme level of Bureaucracy and Corruptions. The overall side effect of the Angel Tax was that a startup tend to loose a significant chunk of their investment and since in the beginning of the launch of any startup venture to achieve a break even point is very challenging due to heavy investment , this resulted into big chances of losses due to the Cash Burn through the very low Cash Inflow. In the first five year of the launch of any startup venture around 90% of the stratups get failed due to such cash crunch and investor get into financial trouble. That’s why the Startups, Investors, Entrepreneurs and Industry Analysts were demanding from a long time to abolish the Angel Tax.

???? Since to develop the Startup Ecosystem in Bharat the Government of India and State Government are investing a huge amount of incentive schemes, subsidies and developing supporting infrastructure for the Startup Promotion, ?they are not getting the expected output due to the non-sustainability of Startups due to the Financial Failures. This is expected that with the withdrawal of Angel Tax the Startups and Angel Investors will be relaxed and this will boost both the Domestic and Foreign Investment into the Startup Ecosystem of nation. This will increase the confidence of Domestic and Foreign Angel Investors in the Startups Ecosystem and Startups of Bharat. Angel Tax abolition will lead to an influx of Capital which will foster the innovation and growth which is imperative for the development of Startup and Investor friendly Startup Ecosystem. However with this abolition of Angel Tax there is an equally important need to have more financial and regulatory vigilance for the check and balance of any possibility of financial malpractices like laundering and siphoning of money. With this only the Startup Ecosystem can be benefitted and genuine startup can be promoted to make Bharat very soon the third largest economy of the world.

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