Angels may not fear to tread the startup path again with much maligned tax law in the bin

The Centre’s decision to set aside the startup ecosystem’s biggest thorn in the flesh - the angel tax - corrects a wrong that should have been addressed in February’s Union Budget. The decision to abolish it may have come in late, but at least it’s the right one.

 The Income Tax Department’s move to exempt tax on investments made by angel investors into startups, should hopefully drive up funding, rejuvenating the startup ecosystem as a whole. Angel funding has been drying up over the last one year.

According to research carried out by YourStory, fewer early stage deals took place in 2017, compared with the previous two years. In 2017, only 485 Series A and pre-Series A deals took place, worth $542 million, while in 2016, there were 795 early stage deals worth $628 million. In 2015, there were 716 such deals worth a staggering $1.39 billion. Now with angel tax falling by the wayside, 2018 should get better in terms of early-stage deals.

There are some riders though. The angel tax exemption is subject to terms laid out by DIPP, which stated that the share capital of the startup cannot exceed Rs 10 crore after the fund infusion. As per the note, all angel investors with a minimum net worth of Rs 2 crore or an average returned income of over Rs 25 lakh in the preceding three financial years, qualify for tax exemption on investments into startups.

"The central government, hereby notifies that the provisions of clause (viib) of sub-section (2) of section 56 of the said Act shall not apply to consideration received by a company for issue of shares that exceeds the face value of such shares, if the consideration has been received for issue of shares from an investor in accordance with the approval granted by the Inter-Ministerial Board of Certification," the Central Board of Direct Taxes (CBDT) said in its May 24 notification.

An angel investor is someone who helps out startups early in their lifecycle, and generally puts in funds in the range of Rs 10 lakh to Rs 3 crore.

According to a Nasscom-Zinnov report, by 2020, India will have 10,500 startups. This would propel the country into the third spot behind US and UK. With so many startups mushrooming, the Centre was often asked to look into removing angel tax, but it took its own time to arrive at a decision.

Several startups had raised objections over angel funds being taxed, with many of them receiving notices from income tax authorities. This clearly had a spiralling effect on angel investors, who slowed down their investments. But now with angel tax in the bin, 2018 could get the much-needed spark. Angels may not fear to tread the startup path again!