Is Angel Tax removal half baked relief for startups?

The Indian startup ecosystem is rejoicing over the removal of the Angel Tax but does it bring complete relief? Well, the proposed move in the Union Budget 2024-25 is not retrospective. This essentially means that angel investments made before April 2024 are still subject to a 30% upfront tax.

If the removal is limited prospectively, this is a half-baked relief as startups, investors and other stakeholders have been fighting for the removal of the Angel Tax completely, including retrospective investments.

“This (retrospective angel tax) is a big issue which needs to be solved holistically and must include investment between 2012 and 2024,” said a founder whose startup received a notice from the Income Tax department over the valuation premium. “However, there is a broader feeling in the ecosystem that startups will not get income tax notices on share premiums now.”

India implemented the Angel Tax in 2012 with an objective to tackle the menace of unaccounted money [read black money] through capital received from resident investors in a closely held company in excess of their fair market value. Experts outlined that things have undergone a sea change since then, with the UPA government which made the Angel Tax rule also being open to its complete removal.

“The abolition of the Angel Tax from FY25 is a positive step, but its limited scope will continue to be a headache for startups who would remain to suffer from the ramifications of past tax assessments,” said an angel investor who backed over five dozen startups in the past.

The abolishment of the Angel Tax does not address the pain of startups who have been fighting these cases for years. As a disclosure, Entrackr has also received such a notice on the Angel Tax, and we have been contesting this with the authorities since October 2023.

While other markets globally have preferred to lay down ground rules for early-stage valuations, India probably stands alone with its Angel Tax (retrospective).