Context:
Union Finance Minister Nirmala Sitharaman, in her seventh Budget, has proposed the abolition of the Angel Tax, marking a significant step towards strengthening the Indian startup ecosystem. This tax had been a longstanding contentious issue between startups and the Income Tax Department, serving as a major obstacle to growth and investment.
Relevance:
GS3-
- Employment
- Growth and Development
- IT and Computers
- Mobilization of Resources
Mains Question:
The removal of angel tax, combined with procedural simplifications, promises to create a more dynamic and supportive environment for startups. Analyse. (10 Marks, 150 Words).
About Angel Tax:
- The Angel Tax, which was essentially a tax on capital raised by unlisted companies through the issuance of shares, was introduced under Section 56(2)(viii) of the Income Tax Act, 1961.
- It taxed investments above the fair market value of a company as ‘Income from other sources,’ primarily affecting angel investors.
- The excess realization was considered income and taxed accordingly. Although this provision was intended to curb money laundering, it ended up stifling genuine investments and became a significant hurdle for startups.
Significance of the Removal of this Tax:
Transform the Startup Landscape:
- The removal of this tax, especially if accompanied by procedural simplifications, could indeed transform the startup landscape, fostering a more vibrant and dynamic environment that encourages innovation and entrepreneurship.
- The abolition of this tax removes a major barrier that has long impeded the growth of startups and discouraged investment.
- Startups can now raise capital without the fear of being taxed on perceived excess valuations, which often failed to account for the future growth prospects and potential of these young companies.
- This decision is likely to encourage more investors to back innovative ideas, knowing that their investments will not be subjected to additional tax burdens.
- As a result, startups will have greater access to the funding they need to scale their operations, bring new products and services to market, and contribute to economic growth.
Creation of Jobs:
- This strategic move is anticipated to enhance India’s position as a global hub for innovation and entrepreneurship, ultimately benefiting the economy as a whole.
- This, in turn, will boost economic growth and create jobs. For example, the comprehensive digitalization of taxpayer services and the simplification of the GST tax structure demonstrate the government’s commitment to digitalization, which will benefit tech startups in various fields like education, healthcare, and taxation.
- In recent years, India has been a global leader in creating successful entrepreneurship opportunities.
- The investor community, including high-net-worth individuals (HNIs), foreign funds, venture capitalists, and angel investors, has been optimistic about the growth potential of the Indian startup ecosystem.
- However, the Angel Tax had overshadowed this optimism, causing significant distress among startups and investors alike.
- While government initiatives such as Startup India, Stand-up India, and Digital India have created a favorable environment for startups, the Angel Tax was a major issue.
- The Central Board of Direct Taxes (CBDT) had even unsettled the startup ecosystem by directly deducting income tax under Section 68 from the bank accounts of certain startups on unexplained cash credits.
- The abolition of the Angel Tax, along with the recent notification simplifying compliance procedures, reflects the government’s responsiveness to the concerns of the startup community.
Startups no longer need to obtain a fair market value certificate:
- Startups no longer need to obtain a fair market value certificate from a merchant banker or seek approval from an inter-ministerial board.
- Instead, they can request an angel tax exemption from the Department for Promotion of Industry and Internal Trade (DPIIT) with the necessary supporting documents.
- The CBDT is required to respond to such applications within 45 days, offering startups much-needed clarity and certainty.
- While abolishing the Angel Tax is a significant step forward, its impact will largely depend on how it is implemented and further procedural simplifications.
- The focus should be on creating a regulatory environment that is friendly to startups, encouraging both investment and innovation.
- The government’s emphasis on digital public infrastructure and the digitalization of the economy will also play a vital role in supporting tech startups and fostering a culture of innovation.
Conclusion:
Overall, the abolition of the Angel Tax is a welcome move that promises to remove a significant barrier to startup growth and investment. However, for this initiative to truly be transformative, it must be accompanied by procedural simplifications and a supportive regulatory environment. The government’s continued focus on innovation, digitalization, and economic growth will be crucial in unlocking the full potential of this policy change.
