Angel tax removal advised by DPIIT; Finance Ministry to make final decision

The upcoming budget is expected to loosen the tax regulations on angel investments, as the Commerce Ministry has suggested doing away with the infamous “angel tax.” To put things in perspective, startups must pay an angel tax of about 30% on money received from outside investors.

Angel tax received a negative signal from the Piyush Goyal-led ministry, but the Finance Ministry will ultimately make the final decision on the subject, Rajesh Kumar Singh, Secretary (DPIIT), told the media on Thursday.

Many people in the Indian startup scene think that the angel tax is an oppressive law that will never allow entrepreneurship or innovation to flourish. Over the past ten years, a large number of activists, venture capitalists, and angel investors have brought these concerns up.

The government, however, remained convinced that an angel tax was required to stop money laundering.

In 2012, India introduced the angel tax as a means of combating unreported income obtained from resident investors in closely held companies, which exceeded the company’s fair market value. On such startups, the UPA-led government subsequently levied a 30% tax.

“The recommendation regarding removal of angel tax is a welcome move and we (angel investors community) are expecting complete relief from it. Our hopes now lie with the Finance Ministry,” said one of the prolific angel investors who invested in more than 60 startups.

The DPIIT registered startups were exempt from the 30% tax, per the government’s announcement on angel tax in September of last year. According to the government, over 80,000 startups benefited from this action.

In the last six months, however, a number of DPIIT-approved startups and their angel investors have received Income Tax notices regarding fair market valuation, investor worth, and other important financial information.

In fact, the DPIIT’s recommendation is encouraging for the ecosystem. Furthermore, the angel tax has been declared unnecessary in a number of previous court and tribunal rulings. The Finance Ministry, however, has the final say on angel tax matters. Whether startups and the investor community receive the much-needed relief would be an interesting thing to watch.