August 23, 2019
Section 56 (2) VIIB of the Income Tax act will no longer be used against the startups for Angel Tax
The decision was taken to mitigate concerns faced by startups, investors and boost investment
Funds raised by startups will not call for any additional scrutiny from the Income Tax Department
India’s culture of innovation encourages startups for their contributions to the national economy
India’s startup ecosystem rejoiced as Union Finance Minister, Nirmala Sitharaman, announced on August 23 that the Angel Tax provision will be withdrawn for startups in India, as well ad for investors into such ventures. The decision, which came as part of a fiscal stimulus plan, not only offered big relief for Indian startups but is also expected to spur seed stage investments. As per the declaration, Section 56 (2) VIIB of the Income Tax act, under which Angel Tax provision was applicable, will no longer be used against the startups registered with the Department for Promotion of Industry and Internal Trade (DPIIT).
Since its introduction in 2012, Angel Tax has invited strong debates in the Indian startup space, creating concerns for both entrepreneurs and investors alike. The Finance Minister said that the new decision was taken to mitigate difficulties faced by startups and those investing in them. Additionally, any funds raised by these startups will not require any further scrutiny from the IT Department. In her budget speech, Ms Sitharaman had referred to the important contribution of startups to the national economy. She had said that “their continued growth needs to be encouraged” to make investment in India more lucrative.
India is among the top five global destinations for startups, and ranks third for technology-led startups, as per the ASSOCHAM. Hence, the sector has always attracted strong foreign innovator interest, so this decision will only improve investment into India. India’s startup ecosystem is expected to grow at a 10-12 per cent annual rate, with more than 1,000 new startups being born every year. Besides Startup India, the Government’s push for digitisation (Digital India), investment (Make in India), skill development (Skill India), e-governance, among other initiatives, has already provided diverse opportunities for startups.