Angel Tax Turmoil: CII Champions Reform for India's Startup Lifeline

Is the Angel Tax killing India's startups? CII is urging the government to scrap it in the upcoming budget. They argue this tax is stifling innovation and capital flow, hindering startup growth. Will the government listen? Read more to find out.

Swati Dayal
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Angel Tax Turmoil CII Champions Reform for India Startup Lifeline

The Confederation of Indian Industry (CII) is waging a war on the Angel Tax, urging its eradication in the upcoming Union Budget 2024. This tax, a thorn in the side of the startup ecosystem, has ignited a firestorm of debate, hindering vital capital formation.

Startup Struggles Fuel Budget Fever

Following the formation of new government, anticipation simmers around the Union Budget, with startups' woes taking center stage. The Angel Tax stands as a prime culprit, drawing condemnation from industry titans and entrepreneurs.

Demystifying the Angel Tax: A Growth Inhibitor

Introduced in 2012 to combat shady investments through inflated valuations, the Angel Tax has morphed into a roadblock for startups seeking funding. Lurking within Section 56(2)(viib) of the Income-tax Act, it levies a hefty 30.6% tax on the difference between share issue price and fair market value, crippling startup funding dynamics.

The provision originally mandated that if an unlisted company, such as a start-up, receives equity investment from a resident that exceeds the face value of its shares, this additional amount would be treated as income for the start-up. Consequently, it would be subject to income tax under the category of ‘Income from other sources’ for that fiscal year.

Following a recent amendment, the government proposed extending this provision to include foreign investors as well. This meant that any funding received by a start-up from a foreign investor would also be considered taxable income.

However, faced with strong opposition from the industry and amidst reports highlighting a decline in funding for start-ups, the Finance Ministry decided to exempt investors from 21 countries, including major economies like the US, UK, and France, from the application of Angel Tax on their investments in unlisted Indian start-ups.

CII President Sanjiv Puri Sounds the Alarm

Sanjiv Puri, CII President, painted a grim picture of the Angel Tax's impact, stating, "Taxing early-stage investments stifles innovation and entrepreneurial spirit. Removing this shackle would unleash a wave of capital, propelling the startup ecosystem to new heights."

The industry contends that the government disregards the inherent risk and potential that justify startup valuations. The Finance Act 2023 exacerbated anxieties by extending the tax to foreign investors starting April 2024, further muddying the funding waters for startups.

The taxation on the disparity between the issue price of unlisted securities and their fair market value has significantly impeded funding, according to industry sources. These tax revisions coincided with a critical period where approximately 100 Indian startups were compelled to lay off more than 15,000 employees in 2023 amidst an enduring funding downturn that originated in 2022. 

This amendment coincided with a brutal funding drought, with a staggering 60% decline in 2023 alone. This dearth of capital has sparked layoffs and stunted growth, prompting urgent pleas for policy reform.

CII Blazes a Trail: Budget Recommendations for a Brighter Future

In its pre-budget submissions, CII advocates for the removal of Section 56(2)(viib) to reignite capital inflow. Additionally, they propose simplifying capital gains tax and TDS to create a smoother investment landscape.

"To bolster India's economic fortitude, we advocate for measures that simplify business operations and cultivate innovation," remarked President Puri, highlighting CII's dedication to fostering a thriving startup ecosystem.

The Road Ahead: Will Reform Prevail?

As stakeholders hold their breath for the unveiling of Union Budget 2024, the potential for transformative reforms hangs heavy in the air. The government's response to the Angel Tax will be a crucial indicator of its commitment to nurturing entrepreneurial spirit and fostering sustainable economic growth.

While challenges persist, the unwavering voice of the industry and advocacy groups like CII underscores a resolute push for policy changes. These changes have the potential to reignite India's startup engine, propelling it towards a future of growth and global prominence.

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