The Centre put forth on Tuesday a motion for the abolition of the contentious ‘Angel Tax’ in its Union Budget 2024, eliciting considerable enthusiasm from the investor and startup communities across India. Additionally, the budget earmarked Rs 1,000 crore to support the growing space industry.
“A number of industry leaders have been making the case for removing the angel tax and it’s so relieving to see it finally happen. I have personally been through the hassle of giving documentation and explaining the valuation for a number of portfolio companies over the past many years,” said Maneesh Bhandari, Founder and CEO of Pune headquartered Growthpal, a M&A deal sourcing platform.
“While the angel tax has long been recognised as a challenge for investors, it’s the founders who have faced the greatest difficulties. They have had to manage extensive documentation, navigate the complexities of the IT department, and relentlessly follow up with investors to secure their paperwork. All of this was done while contending with the fear of losing a significant portion of their vital fundraising due to the angel tax,” added Bhandari, who is also an angel investor in multiple startups.
Abolition Of Angel Tax
The long-controversial angel tax’s abolition has been eagerly anticipated by startups and the venture capital community. Previously, angel tax was applied to funds raised by unlisted companies when shares were issued at a valuation higher than their fair market value. This tax was introduced as a deterrent against money laundering and placed a heavy financial burden on startups, as it taxed the difference between the fair value and the actual investment at a high rate of 30.9 per cent.
The removal is expected to benefit startups by helping in increased capital efficiency as they can now use the entirety of their raised funds for business development rather than setting aside a decent portion for tax liabilities. This change is likely to improve investor confidence and potentially attract more investment by eliminating the risk of substantial tax implications.
“Angel Tax abolishment was long pending, glad that Hon. FM has heard industry voices and has finally abolished it. This will certainly help in expansion of angel investment in India and will take away a lot of burden from the minds of everyone on tax notice for tax paid investment. This will also free up a lot of domestic capital and improve the funding sentiment in a strong way," said Anil Joshi, Managing Partner, Unicorn India Ventures.
Padmaja Ruparel, co-founder at the Indian Angel Network (IAN), also commended the decision and said that it would greatly enhance funding opportunities for startups and enable them to utilise their resources more effectively.
Interestingly, opposition leader P Chidambaram too acknowledged the move as a long-awaited and beneficial change for the startup community.
I was pleased to hear that the FM will abolish the Angel Tax. Congress has pleaded for the abolition for many years and most recently in the Congress Manifesto on page 31
— P. Chidambaram (@PChidambaram_IN) July 23, 2024
Rs 1,000 Cr Fund For Space
In another welcome announcement, Finance Minister Nirmala Sitharaman revealed the creation of a Rs 1,000 crore venture capital fund dedicated to the space sector. This initiative has been introduced to help expand India’s space economy over the next decade, with a target to increase its size fivefold.
“With our continued emphasis on expanding the space economy by 5 times in the next 10 years, a venture capital fund of Rs 1,000 crore will be set up,” said the FM during the Union Budget announcement.
Reacting to the announcement, Awais Ahmed, Founder and CEO at Pixxel, welcomed the announcement and said that it represents a major step forward for India’s space industry. While acknowledging that further investment will be needed as the sector grows, Ahmed added that this initial funding will be a vital catalyst for progress and innovation in space technology.
“The Rs 1,000 crore fund of funds for space tech is testimonial to India’s capability in coming up with breakthrough solutions at low cost. This will certainly help space tech companies to look for much needed early-stage capital to get started. This will certainly help mobilise over Rs 4,000 crore, great move,” explained Unicorn India Ventures’ Joshi.
As per consulting firm Arthur D. Little’s report, India’s space market is worth USD 8 billion, growing at a rate of 4 per cent in recent years. But the market is expected to reach USD 40 billion by 2040.
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