How Angel Tax Provisions Will Attract Global Investments?

The Indian start-up ecosystem has a lot to cheer as the government has recently announced a slew of measures to increase the flow of investments to start-ups. In Finance Minister Nirmala Sitharaman’s Union Budget speech, she announced that start-ups and their investors would no longer be subject to the infamous angel tax. This move is expected to encourage the start-ups to raise more funds by angel investors, and at the same time, foreign investors will be attracted to invest in the Indian start-up ecosystem.

What is Angel Tax?

Angel tax was a provision that was introduced in the Finance Act of 2012 under Section 56(2)(viib) of the Income Tax Act. This provision allowed the Income Tax Department to scrutinize the books of start-ups and tax the capital raised by them from angel investors as income, if the value of the start-up’s shares exceeded their fair market value. The main goal of this provision was to prevent the generation of black money. However, it had a major impact on the start-up ecosystem as many start-ups were struggling to prove the fair market value of their shares. Additionally, this provision resulted in a lot of tax notices being sent to investors, thereby hindering the flow of investments to start-ups.

How the Reforms Will Help Start-ups?

The government has made a significant policy change in favor of the start-up ecosystem by removing Section 56(2)(viib) in the latest budget. The government has also given immunity to start-ups who have already received notices by the Income Tax Department under this provision. The government has also increased the turnover threshold from 25 crores to 100 crores for availing tax exemptions for start-ups. These reforms will help start-ups in the following ways:

Greater Access to Capital:

The removal of angel tax provisions will help start-ups to raise capital easily from angel investors. It will also ensure that the investments coming into start-ups will not be treated as income, keeping both start-ups and angel investors free from the purview of the Income Tax Department. The move will also help start-ups to get funding from foreign angel investors, which can help to accelerate their growth.

Boost in Employment:

The Indian start-up ecosystem provides direct and indirect employment, and with more capital, start-ups can innovate and scale. Removing angel tax provisions will help start-ups to have access to more capital which will boost employment in the sector and contribute to the growth of the economy.

Increased Business Opportunities:

Besides having access to more capital, removing angel tax provisions will help start-ups to explore new business opportunities. It will also enable them to expand their business horizons to other countries and collaborate with foreign investors. Additionally, start-ups can now focus on innovation instead of worrying about raising funds and facing tax notices.

Impact of Angel Tax Provisions on Foreign Investors:

Angel tax provisions were a major cause of concern for foreign investors who were hesitant to invest in Indian start-ups because of the fear of being taxed. But with the removal of angel tax provisions, they will see India as a more conducive investment market. As a result, start-ups can expect to receive more investments from foreign investors, thereby giving a boost to the Indian start-up ecosystem.

Conclusion:

The abolishment of the angel tax provision is a significant move by the government to boost the start-up ecosystem and encourage investments in the country. This move will promote the growth of start-ups by facilitating their access to capital, which in turn, will create more jobs and business opportunities. Foreign investors will also be attracted to invest in start-ups, making India a more attractive investment destination. With these measures in place, the Indian start-up ecosystem is poised to achieve new heights in the coming years.