Amidst concerns over declining funding and layoffs at startups, industry bodies have urged the government to remove the controversial Angel Tax provision. The Confederation of Indian Industry (CII) in its pre-budget recommendations stated that abolishing Section 56(2)(viib) of the Income Tax Act, commonly known as Angel Tax, would significantly increase capital availability for new businesses.
Angel Tax was introduced in 2012 to curb the use of unaccounted money through investments in unlisted firms at inflated valuations. It levies a 30% tax on the capital raised by startups if their shares are priced above fair market value as determined by tax authorities.
While DPIIT-registered startups were exempted, the industry argued that valuations factor in future potential rather than current performance. They said taxes on valuation differences discouraged funding at a critical stage. The changes came as an estimated 15,000 employees lost jobs following funding crunch faced by over 100 startups last year.
A recent finance law amendment proposed expanding the tax net to include foreign investments too from next fiscal. However, after protests, investments from 21 major countries including the US and UK were kept outside the purview for overseas funding in domestic startups. Key startup hubs like Singapore were left out of the list though.
With capital injections down over 60% and recruitments on the wane, removing the contentious tax is critical to stimulate job creation and innovation according to industry representatives. While exemptions have provided relief, a permanent solution is needed to ensure a conducive environment for budding entrepreneurs.
(viib) known as Angel Tax, stating it will help increase capital formation for new businesses in the country.){kind=link}