Angel tax was on investments, such inflows should not be taxed: DPIIT Secretary Rajesh Kumar Singh

Budget 2024: Removal of angel tax for startups to boost foreign investments, innovation, and ease of doing business in India, says top DPIIT official

Removal of the Angel tax for startups was a long pending issue as this levy was on investment coming into the country and such overseas inflows should not be taxed, a top government official said.

Rajesh Kumar Singh, Secretary, Department for Promotion of Industry and Internal Trade (DPIIT), said the decision will help in attracting foreign investments, promoting innovation and further strengthening the startup ecosystem of the country, which is the third largest in the world. “So this was an ease of doing business issue as well as a tax issue. Ultimately, it was a tax not on income but on investments and investments should not get taxed, that is the basic idea,” Mr. Singh told PTI.

Giving a big relief to startups, the government on July 23 announced the removal of angel tax for all classes of investors. The decision will also reduce disputes and litigation, thereby providing tax certainty and policy stability. Besides, it will also bring down the demand embroiled in assessment and litigation.

Angel tax (income tax at the rate of over 30%) refers to the income tax that the government imposes on funding raised by unlisted companies, or startups, if their valuation exceeds the company's fair market value.

Explaining the rationale further, Mr. Singh said that the tax hurt investors. Because of that tax, a “genuinely good” idea was not getting supported in India and it was forcing people to flee abroad and get their money. “So actually it reduces FDI (foreign direct investment) into India and it also creates a system where people domicile themselves outside the country and then after a long time they come back because ultimately the market is here,” he noted.

On the concerns about money laundering issues in such investments and why an investor pays a premium to only an idea of a startup, Mr. Singh said that those matters can be handled through other legislation which already exists. “You are trying to tackle 1-2-3% of people who are doing that [money laundering], but you are burdening 97% people who are genuine innovators and trying to sell an idea and get investments for it,” he said.

The angel tax was forcing startups to approach foreign investors and now after the removal of this clause from the Income tax act, budding entrepreneurs would be able to raise funds.