No relief for startups from angel tax

NEW DELHI: Indian startups that have been struggling to raise capital, amid a global economic downturn, will get no immediate relief from angel tax, the ambit of which was proposed to be extended to foreign investors in the Budget 2023-24.

According to the key amendments made to the Finance Bill 2023-24 , no changes have been made to the angel tax proposals announced in the budget and they will come into effect from FY2024 or assessment year 2024-2025.

“With passing of the Finance Bill, 2023, the applicability of angel tax on foreign investors has been cemented. There was confusion about whether this goes live from April 1, 2024 or April 1, 2023. But the memorandum to the Finance Bill 2023 clearly states that it applies from assessment year 2024-25, which is financial year 2023-24,” said Siddarth Pai, founding partner at 3one4 Capital.

“The only two classes of investors whose investments are exempted from angel tax are Sebi-registered CAT I and II AIFs (alternate investment fund) as well as IFSCA-registered CAT I and II AIFs (under the IFSCA FME Regulations, 2022,” Pai said.

Startups faced by angel tax notices are required to pay 25% of the investment raised as the tax amount and twice that amount as penalty for violating the exemption conditions, experts said.

The industry, however, is still hopeful that the government will come around and provide relief to the startup sector. “The startup ecosystem still holds hope for exemptions to international institutional investors like VC funds. The central government is empowered to do so via notification. The hope is that the notification comes before April 1, 2023 so that ongoing funding rounds aren’t dislocated,” Pai added.

Expanding the scope of angel tax to foreign investors at a time when funding is already sluggish is a blow for startups, many of whom depend on overseas funding to grow their businesses. Investments from global firms like Japan’s SoftBank, US-based Tiger Global have helped several startups scale their businesses and achieve billion dollar valuations. After raising close to $40 billion in funding in 2021, startup investments dipped to $25.7 billion last year.