Fear of Indian startups being put at risk due to angel tax

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Mumbai: Recently, the government has tightened the rules for foreign investment in startups. This change in rules has worried everyone from startups to venture capital (VC) investors. Angel tax has become a concern for startups.

Angel tax regime was introduced in 2012. It was implemented with the aim of preventing money laundering. If a startup raises funds from angel investors and these funds are more than the fair value of the shares, it may be taxed.

Angel investors provide financial support to startups. It is often seen that angel investors are family and friends of the founder of the startup. Till now, two types of investors in startups were exempted from angel tax. This includes VC firms registered as alternative investment funds in India and all foreign investors.

Through an amendment in the Union Budget 2023 Finance Bill, the government has abolished the tax exemption granted to foreign investors. According to industry officials, 90 percent of investments in startups in India come from foreign sources.

The start-up industry believes that the removal of tax exemption on foreign investment will have a negative impact on the activities of startups. They will face difficulties in salary advances, stock M&A, setting up subsidiaries or contributing to ESOP trusts.

A major impact could be that to avoid the impact of the angel tax, entrepreneurs may try to shift overseas, where such tax norms do not apply.

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