Union Budget: Angel tax abolition to boost funding in Kerala’s startup ecosystem | Onmanorama News | Union Budget 2024

Kochi: The startup community in Kerala, including founders and investors, have welcomed the central government’s decision to abolish the angel tax which has been a topic of discussion among the aspiring entrepreneurial class for over a decade since its introduction.

“To bolster the Indian start-up eco-system, boost the entrepreneurial spirit and support innovation, I propose to abolish the so-called angel tax for all classes of investors,” Union Finance Minister Nirmala Sitharaman said on Tuesday while presenting the union budget.

Angel tax refers to the tax imposed on excess capital raised over fair market value. It was introduced in 2012 in an attempt to prevent money laundering and its scope was widened even to non-resident investors from April 2024 drawing strong opposition by startups.

This tax provision classified investments received by startups from external investors as “income from other sources” and used to tax them at a rate of 30 per cent. Both the startup founders and investors were not happy with the tax as it hindered their aim to infuse maximum capital investment to a promising product.

Startups faced a tax burden when the capital raised from issuing shares was deemed in excess of the fair market value, with the excess amount being considered income and thus taxable. This made it more costly and complex for startups to raise funds. On the other hand, investors were deterred from investing in startups due to the potential tax implications and the increased scrutiny from tax authorities, which could complicate and delay the investment process.

The stakeholders in the ecosystem in Kerala feel that both the startups and the investors will be benefited with the decision to do away with the tax.

“Abolition of angel tax is one of the best steps for startup ecosystem in India. This will enable more high-networth individuals in the country to actively participate in startup funding, and startups will be seen as a viable asset class. Startups will also benefit from the reduced regulatory challenges,” Robin Panicker, Venture Partner – Unicorn India Ventures, told Onmanorama.

“It’s a welcome move because there’s been some uncertainty about it for sometime. The uncertainty prevailed over where it applies, how much and at what valuation does it apply. The decision to abolish the tax should boost investment in startups and avoid unnecessary discussions about taxation and all. The decision makes things clearer for startups and investors,” Vineet Mohan of Konglo Ventures, a prominent angel network, echoed Panicker’s views.

The Union Budget 2024’s announcement to abolish the angel tax for all classes of investors is a significant move to support the Indian startup ecosystem. This step is expected to boost entrepreneurial spirit, encourage innovation, and make India a more attractive destination for startup investments.

“This is expected to significantly enhance funding prospects for startups, as it will reduce financial burdens, encourage more investments, and enable early-stage startups to attract more domestic investments. For instance, sectors like fintech and health tech, which previously faced challenges due to the angel tax, can now look forward to a surge in funding and innovation,” said Deepu Xavier, co-founder of Zappyhire, a Kochi-based startup focussing on AI-driven recruitments.