The End of An Era – Angel Tax Abolished

Introduction:
One of the key highlights of the Budget 2024, announced by the Hon’ble Union Finance Minister that attracted the investors and the entrepreneurial class, is the scrapping of ‘Angel Tax’. “….to bolster the Indian startup eco-system, boost the entrepreneurial spirit and support innovation, I propose to abolish the so-called angel tax for all classes of investors”, she said.
This move is believed to strengthen the start-up ecosystem by enabling the entrepreneurs to concentrate more on innovation rather than on tax-planning and other tax issues. Earlier, even during the Interim Budget in February, the Union Government had proposed to extend the tax incentives accorded to the Start-ups and investments backed by sovereign wealth or pension funds up to March 2025. This approach of the Union Government towards startup community is hailed by experts throughout the country and is expected to give fruitful results in the future.
What is Angel Tax?
The concept of ‘Angel Tax’ was introduced by the Budget of 2012. It is brought under the head ‘Measures to deter generation and flow of unaccounted money’ and as such came with the objective to curb ‘money laundering’. People investing in startups to launder money was prevalent in the past. So, Section 56(2)(viib) of the Income Tax Act, 1961 (hereinafter called ‘the Act’) dealt with such cases.
Startups, as known to be in their initial stage of development, required financial support/push in order to take their innovation to the market. So, affluent individuals like HNIs (High Net Worth Individuals) and other investors, offered ‘Capital’ to such startups in return for a convertible debt or ownership equity and as such they are termed as ‘Angel Investors’.
Over a period of time, some of the startups were used as a tool for these Angel Investors to invest their black money by buying ownership rights (equity shares) of the startup for a premium over and above the Fair Market Value (herein after called as FMV) of such shares, thereby bringing their unaccounted money into light. Such excessive consideration was taxed as ‘Income from Other Sources’ under the Act and was taxed at an effective rate of 30.9%. This tax on the ‘Angel Investment’ is termed as ‘Angel Tax’.