The Indian startup ecosystem on Tuesday hailed the Union Budget 2024 for abolishing angel tax -- the tax imposed on funds raised by startups from angel investors -- for all classes of financiers.

Union Finance Minister Nirmala Sitharaman, in her budget speech, said that the move was aimed at bolstering the Indian startup ecosystem, boosting the entrepreneurial spirit, and supporting innovation.

“The removal of angel tax is great news for early-stage startups and shows the government's support for startup funding. The focus on creating jobs, developing skills, supporting MSMEs, and boosting manufacturing is setting the stage for a better India,” added Varun Gupta, Co-Founder, BOULT.

"The elimination of angel tax will boost confidence among investors in India, particularly at a time when startup funding is declining,” added Neha Singh, co-founder of Tracxn.

According to a recent report by Tracxn, a leading market intelligence platform, the Indian startup ecosystem saw a 13 per cent decrease in funding in H1 2024 compared to H1 2023.

“The removal of angel tax is a strategic step towards positioning India as a global hub for innovation, increasing domestic capital formation, and enhancing the ease of doing business. This initiative creates a favourable environment for innovation and entrepreneurship, showcasing the government's commitment to fostering a vibrant startup ecosystem," Singh said.

Fintech Association for Consumer Empowerment (FACE) said the step will “benefit the startup ecosystem and encourage innovation.”

“The enhanced support for MSMEs, including the introduction of the credit guarantee scheme and increased Mudra loan limits, will invigorate the manufacturing and services sectors, driving growth and global competitiveness,” it added.

Introduced in the 2012 Union Budget by then Finance Minister Pranab Mukherjee, the primary objective of angel tax was to check money laundering practices through investments in startups.

It also aimed to catch bogus firms. However, the premium paid by investors was considered as income, taxable at around 31 per cent, by tax authorities.

“This caused a lot of problems and heartburn. It is such a relief that angel tax is finally scrapped. This has been much sought from the startup ecosystem -- both founders and investors,” said M Ramakrishnan, Managing Director at Primus Partners.

“This action to abolish angel tax has the ability to bring a lot of regulatory clarity which generally is appreciated by investor communities across the world. This should help founders looking to raise capital both in domestic and international markets,” added Ankur Mittal, Cofounder, Inflection Point Ventures.

--IANS