Bengaluru: India abolished a tax it had imposed on investors pumping money into its startups on Tuesday, in a move that is expected to spur innovation and boost funding for fledgling companies in Asia’s No.3 economy.
“To bolster the India startup ecosystem, to boost entrepreneurial spirit and support innovation, I propose abolishing angel tax for all classes of investors,” Finance Minister Nirmala Sitharaman said in her budget speech.
“Angel tax”, introduced in 2012 in an attempt to prevent money laundering, has been a headache for nascent startups and their investors. It refers to the tax imposed on excess capital raised over fair market value.
Tuesday’s move “eliminates a major hurdle, making it easier and more attractive for investors to support early-stage startups,” said Prashanth Prakash, a partner at venture capital firm Accel.
The move, which addresses a key demand from the startup community, follows several attempts to simplify the tax.
In 2019, the government exempted start-ups registered with the Department for Promotion of Industry and Internal Trade from its provisions. In 2023, it exempted the tax from being applied on certain types of foreign portfolio investors, domestic banks, insurance companies and sovereign wealth funds.
“This forward-thinking move by the government eradicates a significant compliance burden, attracting investment and fostering an environment where startups can truly thrive,” PhonePe CFO Adarsh Nahata told Reuters.
India’s startup industry has struggled with access to growth capital in recent times. PE/VC investments into Indian companies fell 24% in the first half of 2024 versus the same period in 2023, data from Venture Intelligence showed.
“For the last 12 years, this has been a major irritant, cause of angst, anguish among angel investors, founders, and the startup ecosystem,” said K Ganesh, the man behind startups such as online grocery store BigBasket and home healthcare service provider Portea Medical.
The move will also bring down the time spent on tax-related litigation.
“Founders and investors will feel more at ease after this change, allowing them to concentrate on building their businesses,” Blume Ventures Finance Head Mitul Mehta said.
(Reporting by Ashwin Manikandan and Haripriya Suresh; Editing by Dhanya Skariachan, Editing by William Maclean)
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