1

Angel Tax: A Tax on Innovation, A Burden on Startups

What is the Angel Tax?

The Angel Tax, formerly known as Section 56 2 vii b of the Income Tax Act, is a tax imposed on funds raised by startups from angel investors. In essence, it is a levy on the capital raised by unlisted companies through the issuance of shares to investors.

Impact on Startups

The Angel Tax has a significant impact on startups, particularly during their early stages when they rely heavily on external funding. The tax liability can reduce the amount of funds available for growth and development, stifling innovation and limiting their potential.

Tax Rate and Exemption

In India, the Angel Tax rate is set at 30%, with an additional cess of 3%. However, startups recognized as eligible by the Department for Promotion of Industry and Internal Trade (DPIIT) are exempt from the tax for the first seven years of their operation.

Scrapping of the Angel Tax

Recognizing the burden it placed on startups, the Indian government scrapped the Angel Tax in 2022. This move was hailed as a welcome relief for the startup ecosystem, as it removed a major obstacle to seed-stage funding.

Conclusion

The Angel Tax was a barrier to innovation and growth for startups in India. Its scrapping marks a significant step towards creating a more favorable environment for entrepreneurship and economic development. As the startup ecosystem continues to thrive, it is essential to ensure that policies support their growth and foster a culture of innovation that will drive India's future economic success.

1