DPIIT recommends removal of angel tax; Finance Ministry to take final call

The tax regime on angel investments is likely to be relaxed in the upcoming budget as the Commerce Ministry has recommended to abolish the notorious “angel tax.” To set context, startups are levied around 30% angel tax on investments made by external investors.

The Piyush Goyal-led ministry gave a red signal to angel tax, but the ultimate decision on the matter will be taken by the Finance Ministry, Rajesh Kumar Singh, Secretary (DPIIT), said to the media on Thursday.

Many in the Indian startup ecosystem believe that the angel tax is a draconian law which cripples growth of entrepreneurship and innovation. Many angel investors, venture capitalists and activists have been raising these issues in the past decade. However, the government continued to be of the view that angel tax is necessary to curb money laundering.

India 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 UPA-led government then charged 30% tax on such startups. 

“The recommendation regarding removal of angel tax is a welcome move and we (angel investors community) are expecting complete relief from it. Our hopes now lie with the Finance Ministry,” said one of the prolific angel investors who invested in more than 60 startups.

According to the government notification on angel tax in September last year, the DPIIT registered startups were exempted from the 30% taxation. The government claimed that this move offered relief to over 80,000 startups.

Nevertheless, many DPIIT-approved startups along with their angel investors received Income Tax notices over fair market valuation and details about investors’ worth and other key financial details in the past six months.

The recommendation from the DPIIT is indeed a positive sign for the ecosystem. Moreover, several courts and tribunal rulings in the past have asserted that the angel tax is unnecessary. However, the ultimate call on angel tax rests with the Finance Ministry. It would be interesting to see whether startups and the investor community get the much sought after relief or not.