No relief for startups from angel tax

In NEW DELHI: The angel tax, whose scope was intended to be expanded to include foreign investors in the Budget 2023–24, will not provide any immediate assistance to Indian companies that have been trying to seek funding in the midst of a global economic slowdown.
The significant modifications to the Finance Bill 2023–24 state that the budget’s proposed angel tax measures have not been altered and will take effect in FY2024 or assessment year 2024–2025.
“With the Finance Bill, 2023’s passage, the angel tax’s applicability to foreign investors has been solidified. It was unclear if this would go into effect on April 1, 2024, or April 1, 2023. Yet, the Finance Bill 2023’s memorandum makes it explicit that it only applies to the financial year 2023–24 (assessment year 2024–25), according to Siddarth Pai, a founding partner of 3one4 Capital.

According to Pai, “under the IFSCA FME Rules, 2022, Sebi-registered CAT I and II AIFs as well as IFSCA-registered CAT I and II AIFs are the only two groups of investors whose investments are immune from angel tax.”

According to experts, startups that receive angel tax warnings must pay 25% of the capital raised as tax and a penalty of twice that amount for breaking the terms of the exemption.

Nonetheless, the sector is still holding out hope that the government will change its mind and offer aid to the startup industry. “There is yet hope for exemptions for foreign institutional investors, such as VC firms, in the startup ecosystem. A notification gives the federal government the authority to act in this way. In order to avoid disrupting present investment rounds, it is hoped that the notification will be made before April 1, 2023,” Pai stated.

At a time when funding is already scarce, extending the application of the angel tax to foreign investors is a setback for entrepreneurs, as many of them rely on foreign investment to expand their companies. Tiger Global, based in the US, and SoftBank, a Japanese company, both made investments that helped multiple entrepreneurs develop their operations and reach billion-dollar valuations. Startup investments decreased to $25.7 billion last year from almost $40 billion in 2021.