Angel Tax scrapped: FM Sitharaman explains the rationale behind removing the decade-old tax

The Narendra Modi government’s decision to scrap angel tax in the Union Budget was taken to remove the hindrances that startups face in the country, Union Finance Minister Nirmala Sitharaman revealed in an interview with The Economic Times on Thursday.“Two years ago, we tried removing hurdles for the startups. One year ago, we said startups will not be included at all. So, every year since 2016, when startups have been given such impetus by this government, we’ve tried removing many hindrances that startups were facing and this was one of them,” Sitharaman said as she revealed the rationale behind this move.

The Union Budget 2024 brought respite for venture investors as it abolished the decade-old Angel Tax.

Elaborating on the rationale further, Sitharaman said that it was one of the many steps Centre took to help Indian startups thrive. This move, however, leaves those pending to pay their previously due angel taxes in a tough spot.

Sitharaman revealed that the government is working to ‘sort this out’.”The Revenue Secretary said Wednesday we will try to sort it out. My approach would be to see how best we can sort this out. Because it can’t be that we’ve removed a tax but those litigations are going to hang fire. That cannot be a fair treatment. We will have to work out something,” Sitharaman said.Angel Tax was a crucial point of discussion amongst startup industry leaders, who have long argued that it placed an undue financial and compliance burden on young ventures. This tax deterred the growth of genuine risk capital for the fast-growing industry, experts had stated.The tax was first introduced in the Union Budget of 2012 by former Finance Minister Pranab Mukherjee, under the UPA 2.0 regime, as a move to crackdown on money launderers. However, FM Sitharaman said that the measures are now already in place are enough to arrest launderers of money under the guise of businesses.

“We were confident that the PMLA (Prevention of Money Laundering Act) and the Black Money Act are adequate to sort this out, so we’ve just removed it,” Sitharaman said.

The Manmohan Singh government’s argument when it first brought Angel Tax into effect was that it would help distinguish between legitimate startups and those using the channel to funnel money through the system.

Under Modi 3.0, the strategy to combat such money launders has changed.

“What has changed is our attempt to remove those elements which were the pain points. We tried doing it. But now there is no other way in which you can make that law, that particular section, doubt-free,” Sitharaman said.

“The provisions of PMLA and Black Money Act if invoked rightly are more than sufficient and you don’t need this section in the IT Act,” she added.