Good news for young startups as India eases scrutiny on angel investment

Ready to take flight.
Ready to take flight.
Image: Reuters/Ilya Naymushin
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The Narendra Modi government has partially addressed a long-standing challenge that India’s booming startup industry has been facing for nearly a decade now.

Startups and investors who file requisite declarations will not face additional scrutiny related to angel tax, finance minister Nirmala Sitharaman assured during her budget speech today (July 5).

Angel tax is levied when a privately-held company raises funds at a rate higher than its “fair valuation.” Currently, India levies a 30% angel tax. It was introduced in 2012 in a bid to curb money laundering via small companies. However, over the years, it has driven up regulatory and monetary pressure on budding firms, threatening their survival.

Over the last year or so, many Indian startups have received tax notices from the income tax department demanding sky-high penalties, which in some cases is higher than the total funding itself.

Going forward, special administrative arrangements will be made by the Central Board of Direct Taxes (CBDT) for pending assessments of startups and redressal of their grievances, Sitharaman added. Also, an e-verification mechanism will be put in place so that funds raised by startups are not brought under the scanner.

During the interim budget in February, the government had maintained a stoic silence on the contentious tax, disappointing many in the ecosystem. But this announcement, which will likely create a more hospitable environment and help overcome the funding drought facing smaller startups, is being heralded by entrepreneurs and investors.

But the devil is in the details, and some people are holding off the celebrations for now. After all, the tax hasn’t been completely abolished just yet.