Union Budget 2024: Angel Tax for All Classes of Investors to Be Abolished (GS Paper 3, Economy)
Why in News?
- To bolster the Indian startup ecosystem, the Union Budget 2024 announced the abolishment of the angel tax for all classes of investors, effective April 1, 2025.
- This move aims to encourage innovation and ease the fundraising process for startups.
What is Angel Tax?
- Introduction: Introduced in 2012 under the Finance Act.
- Definition: Angel tax refers to the income tax imposed on funding raised by unlisted companies or startups if their valuation exceeds the company's fair market value. It falls under Section 56(2)(viib) of the Income Tax Act.
- Scope Expansion: Initially applied only to local investors, the 2023-24 fiscal year budget expanded its scope to include foreign investments.
- Purpose: Aimed at curbing money laundering and preventing the influx of unaccounted funds. However, it has been controversial among startups and investors, who argue it hinders innovation and fundraising.
Reasons for Abolishment
- Boosting the Ecosystem: The abolishment aims to strengthen the Indian startup ecosystem, boost entrepreneurial spirit, and support innovation.
- Enhancing FDI: The removal of angel tax addresses concerns of various investors, especially amidst a decline in funding over the past year.
- Unicorn Decline: The number of unicorns in India has dipped due to a slowdown in the startup ecosystem. A "unicorn" is a privately-owned startup valued at over $1 billion.
Indian Startup Ecosystem
- Global Ranking: India has the third-largest startup ecosystem in the world.
- Growth Factors: Increased internet penetration, digitization, and government initiatives have fueled the growth of top-funded sectors from 2014 to 2023. These sectors include Retail, Enterprise Applications, Fintech, Transportation & Logistics Tech, Food & Agriculture Tech, Auto Tech, Travel & Hospitality Tech, and Edtech.
- Women-led Startups: These have seen growth, with total funding reaching $1.1 billion in 2023 from $0.456 billion in 2014.
Indian Initiatives in Startups
- Startup India Initiative: Launched in January 2016 to build a strong startup ecosystem, nurture innovation, and encourage investments. DPIIT-recognized startups get access to various incentives under schemes like Fund of Funds for Startups (FFS), Startup India Seed Fund Scheme (SISFS), and Credit Guarantee Scheme for Startups (CGSS).
- Startup India Seed Fund Scheme: Approved for four years from FY22, with an outlay of ₹945 crore, it aims to provide financial assistance for proof of concept, prototype development, product trials, market entry, and commercialization.
- Startup Mahakumbh: A two-day event to showcase India’s startup prowess and foster collaboration and growth within the ecosystem.
- Green Mobility: Government initiatives towards green mobility create opportunities for businesses in charging infrastructure, battery recycling, and energy storage solutions.
- Startup20: Under India’s G20 presidency, the introduction of Startup20 aims to elevate the Indian startup ecosystem to global recognition and impact.
Major Challenges
- Regulatory Environment: Many startups face difficulties navigating the regulatory environment and obtaining necessary approvals and licenses.
- Infrastructure: There is a lack of infrastructure to support startups.
- Skilled Talent: A shortage of skilled talent poses a significant challenge.
- Urban Concentration: Startups are primarily concentrated in urban areas.
- Social Enterprises: These often face difficulty securing investment due to cautious investor attitudes towards untested business models and technologies.
Conclusion
- The abolishment of the angel tax is a significant step towards enhancing the Indian startup ecosystem.
- By addressing key investor concerns and creating a more favorable environment for innovation and growth, this policy change aims to propel India’s startups to new heights, fostering a robust and dynamic entrepreneurial landscape.
