The removal of this tax, combined with procedural simplifications, promises to create a more dynamic and supportive environment for startups

Union Finance Minister Nirmala Sitharaman, in her seventh Budget, has proposed to abolish the Angel Tax, a significant move aimed at bolstering the Indian startup ecosystem. This tax had long been a contentious issue between startups and the Income Tax Department, acting as a major hindrance to growth and investment.

The abolition of this tax, if coupled with procedural simplifications, could indeed be a game-changer, fostering a more vibrant and dynamic startup ecosystem that encourages innovation and entrepreneurship.The Angel Tax, essentially a tax on capital raised by unlisted companies through the issue 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. This provision, while well-intentioned to curb money laundering, ended up stifling genuine investments and became a nightmare for startups.The abolition of this tax removes a significant barrier that has long hindered the growth of startups and discouraged investment. Startups can now raise capital without the looming fear of being taxed on perceived excess valuations, which often did not account for the future growth prospects and potential of these young companies.

This move aligns with the government's broader agenda of promoting innovation, employment, education, skilling, and research. The abolition of the Angel Tax is expected to boost the entire startup ecosystem by making it easier for startups to attract investments.

This, in turn, will stimulate economic growth and job creation. For instance, the comprehensive digitalization of taxpayer services and the simplification of the GST tax structure are indicative of the government's commitment to digitalization, which will benefit tech startups across various fields such as education, healthcare, and taxation.India has been a global leader in creating successful entrepreneurship opportunities in recent years.

The investor community, including high-net-worth individuals (HNIs), foreign funds, venture capitalists, and angel investors, has remained bullish on the growth potential of the Indian startup ecosystem. However, the Angel Tax had cast a shadow over this optimism, causing significant distress among startups and investors alike.While the government's initiatives such as Startup India, Stand-up India, and Digital India have provided a favourable environment for startups, the Angel Tax was a significant pain point.

The Central Board of Direct Taxes (CBDT) had even shaken 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, coupled with the recent notification simplifying compliance procedures, reflects the government's responsiveness to the concerns of the startup community.

Startups no longer need to procure a fair market value certificate issued by a merchant banker or seek approval from an inter-ministerial board. Instead, they can request angel tax exemption from the Department of Industrial Policy & Promotion (DIPP) with the necessary supporting documents.

The CBDT is mandated to respond to such applications within 45 days, providing much-needed clarity and certainty to startups.While the abolition of the Angel Tax is a significant step forward, its impact will depend on the implementation and further simplifications of procedures. The focus should be on creating a startup-friendly regulatory environment that encourages investment and innovation. The government’s emphasis on digital public infrastructure and the digitalization of the economy will also play a crucial role in supporting tech startups and fostering a culture of innovation.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 a game-changer, 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 realizing the full potential of this policy change. This could very well mark the beginning of a new era for the Indian startup ecosystem, driving innovation, entrepreneurship, and economic growth in the years to come.

(The author is a senior journalist and the views expressed are personal)