By April 2024, more than 127,000 startups have been officially recognized by the Department for Promotion of Industry and Internal Trade (DPIIT). India’s startup ecosystem has been flourishing since 2016, with new businesses emerging rapidly across the nation. To support this growth, the Indian government launched the Startup India initiative.

However, despite these rising figures, many startups are still struggling. Over half of the Indian startups preparing to go public this year are dealing with ongoing losses, according to a report.

In response to persistent demands from startups, the DPIIT recommended the removal of the Angel Tax. Initially, this tax only applied to funds raised by startups from Indian investors not registered as alternative investment funds (AIFs). However, the Union Budget 2023 extended its application to include foreign investors, raising concerns among venture capital funds registered abroad. This expansion aimed to align the regulations between the Foreign Exchange Management Act (FEMA) and the Income Tax Act.

One of the most widely discussed aspects of Finance Minister Nirmala Sitharaman‘s 2024-25 budget announcement was the removal of the Angel Tax on startups. Siddharth Mala, Correspondent, ObserveNow, engaged with startup leaders to gather their opinions on this issue.

Amid a notable funding slowdown, with startup investments hitting a five-year low in 2023, the industry’s calls for the removal of the Angel Tax have grown louder.

While shedding some light on the abolition of the angel tax Anushita S P Karunakaram, Co-Founder & CEO, Lawyer Desk highlighted 3 major points that “This is A Good Signal for the Start-up Ecosystem”, “Common General Problems Arising for Startups Due to the Angel Tax” & “Growth Opportunities after Abolition of Angel Tax.”

Anushita elaborated that the abolition of the Angel Tax has revitalized the Indian startup ecosystem by removing barriers to early-stage funding, particularly from angel investors. This tax previously complicated fundraising by adding valuation scrutiny and tax liabilities, which hindered growth and long-term planning. Its removal creates a more favorable investment climate, boosting investor confidence and opening doors to domestic and foreign capital. Startups can now focus on innovation and scaling without being bogged down by regulatory hurdles, fostering a more dynamic environment for entrepreneurship.

The Central Board of Direct Taxes has clarified that startups registered with the DPIIT will not be scrutinized for Angel Tax. This exemption applies to both foreign and domestic investments received by DPIIT-registered startups. To qualify for DPIIT registration, a startup must have a turnover of less than ₹100 crore in any of the previous financial years. It can be considered a startup for up to 10 years from its incorporation date.

“The Angel Tax, which imposed up to 30% tax on investments exceeding the fair market value of shares, was a major obstacle. For a fledgling startup like ours, every bit of funding was crucial, and dealing with this tax added a daunting layer of complexity, In our early days, we faced multiple challenges. Securing investments was fraught with delays and complications” said Edwin L, CEO & Co- Founder, Boxigo.

“Investors were wary of the additional tax liabilities, which made it even harder to close deals and accelerate growth. With the Angel Tax now abolished, the landscape has transformed. We’re seeing renewed investor confidence and a smoother funding process. This positive change has allowed us to focus more on scaling our operations and pursuing our vision without the constant worry of tax-related issues. The shift is critical for our growth and aligns seamlessly with our strategic objectives” further added Edwin.

Adding on the same Anshul Jain, Co-founder, Roadcast emphasised “The removal of the Angel Tax is going to be a game-changer for start-ups. Before this, dealing with the Angel Tax was like navigating a minefield. The tax, which slapped a 30% levy on investments that were considered above the “fair market value” of shares, was a hurdle.”

Beyond the removal of the Angel Tax, the government can support startups through policy reforms that address key challenges such as access to capital, regulatory simplification, and infrastructure development. Establishing dedicated startup funds, easing credit access, and providing tax incentives for research and development can stimulate innovation and growth. Streamlining regulations and simplifying compliance processes would reduce the bureaucratic burden, allowing startups to focus on business growth.

Echoing the same Anushita underscored “The removal of the Angel Tax is a move in the right direction, and surely, the government can do a lot more for the cause of startups in India with regard to several other areas. Compliance and regulatory norms need simplification—the lesser the administrative burden, the better—so that startups may focus on growth and innovation. Ease in financial troubles, again at the very stage of setting up a business, through better access to funding by way of grants, low-interest loans, and tax breaks for investors.”

The leaders collectively emphasised that investing in digital infrastructure, strengthening collaboration between academia and industry, and promoting skill development programs can cultivate a more supportive environment for startups to flourish in the competitive global market. Enhancing infrastructure and digital connectivity in tier-2 and tier-3 cities would unlock new opportunities for startups nationwide. Encouraging collaboration between startups and established industries, along with offering support for global expansion through export incentives and trade facilitation, would empower startups to scale and compete internationally. These efforts would foster a growth-oriented ecosystem, drive innovation, and contribute to India’s economic development.