India scraps 'angel tax' in boost for startups

India’s federal government has removed the so-called angel tax for all classes of investors, delivering a major victory to the country’s startup ecosystem that had lobbied for years against the measure.

“To bolster the India startup ecosystem, to boost entrepreneurial spirit and support innovation, I propose abolishing angel tax for all classes of investors,” Finance Minister Nirmala Sitharaman said in her budget speech.

The tax, introduced in 2012 as a measure to control money laundering, has long been a pain point for early-stage companies and their backers. It taxed investments in startups when valuations exceeded what tax officials deemed fair market value — a calculation that often clashed with investors’ more optimistic projections.

The Indian government attempted to simplify the tax in 2019, but even the new structure had limited benefits for the ecosystem. The local tax authority was scrutinizing investment in startups as recently as earlier this year.

“It is a watershed moment in the Indian startup story. A tax on capital is antithetical to capital formation and this has long been used to harass startups and investors,” Siddarth Pai, co-founder and partner at venture capital fund 3one4 Capital, told TechCrunch.

The problem stemmed from how different parties valued startups. Investors typically use discounted cash-flow methods, betting on future potential. Tax authorities, on the other hand, looked at current worth, which is usually low for fledgling startups. This mismatch led to headaches for founders trying to raise capital. For years, prominent voices in India’s startup ecosystem have railed against the angel tax, arguing it was choking off vital funding for innovation.

Amit Mehra, CFO of venture capital fund Lightspeed, said the abolition of the angel tax will help reduce the “significant uncertainty on taxation of investments received by startups on account of the angel tax provisions.”

“The removal of the tax will foster a more supportive environment for investments in the startups and will certainly fuel innovation and growth in the startups. This is essential for startups to remain in India and build from here,” he added.

Sitharaman also announced that the federal government will launch a $120 million venture capital fund to spur the growth of the country’s space economy.