Blow to startups as angel tax to come into effect from April 1, 2024

The Indian government has proceeded with the changes to the so-called angel tax, which may have a big impact on the Indian startup ecosystem.

Centre on Thursday presented the Finance Bill 2023 in Lok Sabha that makes it 

“applicable to share application money/premium received from any person, regardless of their residential status.”

“It means the angel tax may also be levied on receiving excess share application money or premium from non-resident investors,” adds the bill, which amends section 56(2) (viib) of the income tax act.

The proposed changes will come into effect from the financial year 2023-2024, which is the assessment year 2024-2025.

The move essentially means the government has removed the exemption of Angle Tax for receiving funds from outside India (foreign funds and non-resident investors). Now, the startup has to pay a tax on the difference between the capital raised and the fair value of securities sold. Earlier, this did not apply to the capital received from non-resident investors.

India first implemented angel tax in 2012 to help tackle unaccounted money raised through capital received from resident investors in a closely held company in an excess of the fair market value. The government then charged a 30% tax on such startups.

In 2019, however, the Indian government announced that startups registered with the Department for Promotion of Industry and Internal Trade (DPIIT) will be exempted from the angel tax.

That said, the latest changes to the angel tax regime could have large repercussions on the Indian startup ecosystem, which is already reeling under what is widely called “funding winter.” A slew of global VCs, including Tiger Global, Sequoia Capital, and SoftBank have infused capital in the Indian startups.

With funding crunches, startups are scrambling to control cash burn and pivot to profitability. Some firms have also resorted to mass layoffs in order to achieve these.

According to Entrackr’s monthly funding tracker, startups in the country raised $860 million in total across 81 deals in February – significantly lower than January when more than 100 startups mopping up nearly $1.2 billion in funding.

Looking at year-on-year data of February for the past three years, homegrown startups raised $1.2 billion in 2021 which saw a huge jump to $3.56 billion in 2022 and now it came down to $860 million in the last month.

“On one hand, it would impact the inflow of foreign investments into Indian startups. There is a possibility that the government believes that foreign funds may set up AIFs in Gift City under SEBI,” Gaurav VK Singh, co-founder of We Founder Circle, told Entrackr.

Singh added that there was a possibility that global investors might pressure startups to move overseas and invest in these funds, which means that startups may domicile overseas (unless we have exemptions under the proposed angel which we will come to know in the coming days).