India's federal government has repealed the controversial “angel tax” for all investor classes, delivering a major victory for the country's startup ecosystem, which had long lobbied against the measure.
“To strengthen India's startup ecosystem, stimulate entrepreneurship and support innovation, I propose to abolish angel tax for investors across all walks of life,” Finance Minister Nirmala Sitharaman said in her Budget speech.
Introduced in 2012 as an anti-money laundering measure, the tax has long been a thorn in the side of early-stage companies and their backers. It taxes investments in startups whose valuations exceed what tax authorities consider to be fair market value, and its calculations have often clashed with investors' more optimistic projections.
The Indian government tried to simplify the tax system in 2019, but even the new regime had limited benefits for the ecosystem, with local tax authorities continuing to scrutinize investments in startups until earlier this year.
“This is a turning point in the history of Indian startups. Taxing capital goes against capital formation and has been used to punish startups and investors for a long time,” Siddharth Pai, co-founder and partner at venture capital fund 3one4 Capital, told TechCrunch.
The problem stemmed from how different parties value startups. Investors typically use discounted cash flow methods, betting on future potential. Tax authorities, on the other hand, look at the present value, which is usually lower for startups. This mismatch created headaches for founders trying to raise capital. For years, there had been opposition to the angel tax in the Indian startup ecosystem. They argued that it would crowd out vital funding for innovation.
Amit Mehra, CFO of venture capital fund Lightspeed, said scrapping the angel tax would help alleviate “significant uncertainty around tax on investments received by startups due to the angel tax provisions.”
“The removal of the tax will foster a more supportive environment for investment in startups and will certainly encourage startup innovation and growth, which is essential for startups to remain in India and thrive from here,” he added.
Sitharaman also announced that the federal government would set up a $120 million venture capital fund to help grow the country's space economy.