India's federal government has abolished the controversial "angel tax" for all investors, marking a significant victory for the country's startup ecosystem, which has opposed the tax for years. Finance Minister Nirmala Sitharaman announced this change in her budget speech, stating it would bolster the startup ecosystem, entrepreneurial spirit, and innovation.
Introduced in 2012 to curb money laundering, the angel tax taxed investments in startups when valuations exceeded what tax officials considered fair market value. This often conflicted with investors' optimistic projections, creating challenges for early-stage companies. Despite attempts to simplify it in 2019, the tax remained problematic, with local authorities scrutinizing investments as recently as this year.
Siddharth Pai, co-founder of 3one4 Capital, called the abolition a watershed moment, noting that taxing capital hindered capital formation and harassed startups and investors. The valuation discrepancies between investors' future potential calculations and tax authorities' current worth assessments caused significant issues.
Amit Mehra, CFO of Lightspeed, highlighted that removing the angel tax reduces uncertainty for startup investments, fostering a more supportive environment and fueling innovation. He emphasized that this move is crucial for startups to thrive in India.
Additionally, Sitharaman announced a $120 million venture capital fund to spur the growth of India's space economy. The budget proposal to abolish the angel tax meets a longstanding demand from Indian startups. Previously, the tax mandated around 30% on investments from external investors, including foreign investment, which faced taxes over 30% unless exempted by DPIIT.
The startup community, including entrepreneurs, investors, and VCs, welcomed the proposal. Serial entrepreneur K Ganesh praised the abolition, noting it was long overdue and reduced harassment for founders and investors. The removal is expected to attract new investors and boost early-stage startup investments, especially from smaller cities.
Prominent figures such as Titan Capital co-founder Kunal Bahl, All In Capital founder Kushal Bhagia, Capital Mind founder Deepak Shenoy, and former Finance Minister P Chidambaram also expressed support for the tax removal.