The recent abolition of the angel tax in India has led to a wave of optimism among startups. Many companies are now relocating their headquarters back to India. This is due to government initiatives aimed at improving the ease of doing business.
The decision was part of the FY25 Budget. It has helped reverse the trend of startups registering abroad for better tax advantages. The Department for Promotion of Industry and Internal Trade (DPIIT) has reported an increase in the number of startups returning to the country.
The angel tax was introduced in 2012. It aimed to curb tax avoidance and money laundering. It did this by taxing the difference between the fair market value (FMV) of shares and the price at which closely held companies issued them.
This provision was often seen as a deterrent for startups. It led many to seek registration in foreign jurisdictions. The removal of the angel tax has led to a wave of “reverse flipping.” This is where startups that initially registered abroad are now returning to India.
The DPIIT has indicated that this change is positively impacting the equity market. The Ministry of Corporate Affairs is speeding up processes to make it easier for startups to operate in India. Since the launch of the Startup India initiative in 2016, the number of registered startups has surged.
It reached over 157,000 by the end of 2024. In terms of funding, startups received $155 billion in 2024. This is a significant increase from just $8 billion in 2016.
This growth has also led to the creation of over 1.7 million jobs across the country.
Angel tax removal spurs startup growth
It showcases the vital role startups play in the Indian economy.
Countries like Saudi Arabia have shown interest in Indian startups. This is particularly true for events such as the Startup Mahakumbh. The DPIIT is actively pursuing collaborations that allow foreign sovereign pension funds to invest in Indian startups.
This strategy aims to create a global network where startups can address international challenges. This will enhance their visibility and potential for growth. To boost manufacturing startups, the DPIIT has engaged large companies.
The goal is to identify products they can procure from startups. This initiative seeks to create a symbiotic relationship between established firms and emerging startups. It encourages innovation and economic growth.
Ahead of the ninth anniversary of the Startup India programme, the DPIIT is meeting with alternate investment funds (AIFs). They will discuss startup funding. The meeting aims to address capital mobilisation and funding opportunities for startups in smaller cities.
Approximately 75 AIFs are expected to participate. This marks the growing interest in supporting the startup ecosystem in India. The Centre’s Fund of Funds Scheme (FFS) is a key component of this initiative.
It provides financial backing to SEBI-registered AIFs, which in turn invest in startups. The abolition of the angel tax is seen as a pivotal move. It has rejuvenated the Indian startup ecosystem, making it an attractive destination for both domestic and international entrepreneurs.
The government’s continued focus on promoting startups is anticipated to drive significant economic growth and job creation in the coming years.