Angel Tax Removal Will Boost Investments In Indian Startup Ecosystem: CBDT Chairman

The abolishment of the infamous angel tax will boost India’s startup ecosystem and prompt innovators and venture capitalists to invest more, the Central Board of Direct Taxes (CBDT) chairman Ravi Agrawal said.

In a post-budget interview, Agrawal told news agency PTI that he would urge investors to “please come forward, please invest as the country is waiting for your investment, initiatives and innovations”. 

Finance minister Nirmala Sitharaman announced the abolition of the angel tax in her budget speech for 2024-25 on Tuesday (July 23).

“To bolster the Indian startup ecosystem, boost the entrepreneurial spirit and support innovation, I propose to abolish the so-called angel tax for all classes of investors,” Sitharaman said. 

Angel tax, or Section 56(2)(viib), was inserted in the Income Tax Act, 1961 in 2012 to keep shell companies at bay and prevent money laundering. However, over the years, it became a major concern for startups as tax officials began issuing tax notices to startups over their valuation methodology.

Angel tax was payable on capital raised by unlisted companies if the value of the shares issued to investors exceeded their fair market value (FMV). It was a long-standing demand of the startup ecosystem to remove angel tax.

Commenting on tackling money laundering following the removal of angel tax, Agrawal said there are enough provisions to tackle such cases and the Enforcement Directorate (ED) would investigate them.

“The intention… was never to dissuade the startups. It was never to put any stop on the investments… we are in coordination with the DPIIT (Department for Promotion of Industry and Internal Trade) and have actually provided relaxations in so far as the investments are concerned,” he added. 

While the startup ecosystem has welcomed the move to abolish angel tax, there are still concerns around the pending cases. 

According to Mohandas Pai, the former CFO of Infosys and partner at Aarin Capital, the Centre must look into aiding people stuck in “the angel tax web”. “The government must now withdraw all cases pending under angel tax in the last five years and state clearly that no angel tax will be levied on any pending assessments,” he told Inc42.