The federal government of India has eliminated the controversial “angel tax” for all classes of investors, a significant victory for the country’s startup ecosystem that had been advocating against the measure for years
In her budget speech, Finance Minister Nirmala Sitharaman suggested that the angel tax be abolished for all classes of investors to strengthen the Indian startup ecosystem, foster entrepreneurial spirit, and encourage innovation.
The tax, implemented in 2012 to regulate money trafficking, has been frustrating for early-stage companies and their investors for an extended period. It levied taxes on investments in startups when valuations exceeded the fair market value determined by tax officials, a determination that frequently contradicted investors’ more optimistic predictions.
In 2019, the Indian government endeavored to simplify the tax; however, the ecosystem received only modest advantages from the new structure. As recently as earlier this year, the local tax authority was examining venture investments.
“It represents a groundbreaking moment in the history of Indian startups.” “A tax on capital is antithetical to capital formation and has been used to harass startups and investors for a long time,” Siddharth Pai, co-founder and partner at venture capital fund 3one4 Capital, stated to TechCrunch.
The issue was caused by the various stakeholders’ varying valuations of young companies. Investors typically employ discounted cash flow methodologies to speculate on future potential. Conversely, tax authorities assessed the business’s current value, which is typically modest for startups still in the early stages of development.
As a result of this discrepancy, founders encountered difficulties in their efforts to secure capital. The entrepreneur tax has been criticized by prominent figures in India’s startup ecosystem for years. They contended that it was stifling essential funding for innovation.
According to Amit Mehra, the chief financial officer of Lightspeed, a venture capital fund, eliminating the angel tax will alleviate the “substantial uncertainty” surrounding the taxation of investments received by entrepreneurs due to the angel tax provisions.
“The elimination of the tax will create a more conducive environment for investments in startups, which will undoubtedly stimulate innovation and growth.” “This is crucial for startups to remain in India and expand from there,” he continued.
Sitharaman also disclosed that the federal government will establish a $120 million venture capital fund to promote expanding the nation’s space economy.