Union Budget 2024: Major Tax Relief for Startups with Angel Tax Abolition on Foreign Investments
In a welcome move for India’s startup ecosystem, Union Finance Minister Nirmala Sitharaman, in her presentation of the Union Budget 2024 in Parliament on July 23, declared the abolition of the much-debated Angel Tax on foreign investments. Amid a challenging phase of decreased funding known as the funding winter, this measure is expected to provide significant relief to startups by facilitating easier access to financial resources.
During the budget announcement, Sitharaman elaborated that the decision was aimed to “bolster the Indian startup ecosystem, boost the entrepreneurial spirit and support innovation.” The Angel Tax was originally introduced during the UPA government’s tenure and has been a subject of controversy, with many viewing it as a deterrent to foreign investment in Indian startups.
The abolition of the Angel Tax is seen as a means to encourage the flow of foreign capital into the Indian market, enhancing prospects for startups. Revenue Secretary Sanjay Malhotra addressed concerns related to potential money laundering following the tax’s abolition, indicating that existing provisions within the Income Tax Act, alongside the Prevention of Money Laundering Act (PMLA), offer sufficient safeguards to trace the source of these funds and mitigate related risks.
Ashish Aggarwal, Vice President & Head of Public Policy at NASSCOM, lauded the move, suggesting it might also cast a “more benign outlook from the tax department” on some past investments currently not under dispute.
In addition to startups, the Union Budget 2024 also promises affordability in the consumer sector, indicating lower prices for mobile phones, and gold and silver jewellery. Brijesh Damodaran, Partner at Auxano Capital, believes that the easing of tax disputes and freeing up of deposited funds previously tied to litigation will certainly boost the startup environment.
This tax relief comes at a crucial juncture as startup funding in India experienced a sharp decrease, with investments plummeting by 60% in 2023 to $10 Billion, according to the Indian Tech Startup Funding Report 2023. The previous year saw a decline of more than 40%, illustrating a pressing need for supportive measures to revive investor interest and funding momentum.
The Angel Tax, since its inception in 2012, was intended to prevent money laundering through investments in overvalued unlisted companies. However, its impact on startups, which often require investments based on future potential rather than current worth, has been counterproductive, placing financial strains on these emerging businesses during their incubation and early stages.
Rahul Charkha, Partner at Economic Laws Practice, emphasized the decision as a positive stride towards “providing tax certainty, preventing unintended consequences on foreign investments, and supporting startups.” Prior opposition from various stakeholders, including the Department for Promotion of Industry and Internal Trade (DPIIT), underscored the need for reform. The recent amendments to income tax rules in September 2023, aimed at achieving parity between domestic and foreign investors, further highlighted the government’s initiative to create a more equitable investment landscape.
Furthermore, the budget also introduced changes in tax rates on both short and long-term capital gains, effective immediately, signaling a broader effort to revise the fiscal approach towards investments and earnings.
With these announcements, the Union Budget 2024 stands as a landmark moment for India’s startup community, potentially heralding a new phase of growth and innovation driven by enhanced access to foreign capital and a more liberal regulatory environment.
