The demands of various sectors might have been accepted in Budget proposals this year, but it has left the startup industry largely disenchanted. The complete exclusion of angel tax in the policy announcements may have clipped the wings of early-stage startups, most of which depend on capital from angel investors for the initial boost.
As per Section 56 of the I-T Act, all companies are liable to pay taxes on money invested as capital, including on angel funds over the Fair Market Value.
The collective appeal to abolish – or modify – the angel tax structure had reached a crescendo in days leading up to the Budget announcement, with even a petition initiated.
Notorious for its reputation of driving away initial backers, angel tax has become a dead weight for startups for which angel funds are stepping stones to bigger investments from VC groups.
Introduced to rein in undisclosed income, the government has in a way been stifling startups in their enthusiasm to curb money laundering. In fact according to Tracxn, although overall funding went up last year, the percentage of capital invested by angels formed a very small percentage of that compared to the corresponding figures the previous year.
Perhaps the repeal of angel tax could have been one of the reasons for this cautious sentiment among investors.
Industry bodies like Nasscom and Indian Angel Network (IAN) have also been vocal about alternate solutions to protect angel investments, including recognizing credible angel investors and allowing (tax-free) investments from only this accredited group. Offering tax benefits to angels who fund small businesses could have been another way.
Source- Economic Times