Indian Budget 2024: Angel Tax Abolished, New Funds for Startups and Space Sector

India’s Finance Minister Nirmala Sitharaman unveiled several initiatives on Tuesday designed to support the expansion of startups and small enterprises. Her budget speech included significant changes such as repealing the angel tax, modifying tax rates for e-commerce businesses, and adjusting long-term capital gains taxation on certain financial instruments.

While the startups did not have major limelight in this year’s budget, it tackled several concerns from entrepreneurs and investors. Notably, the removal of the angel tax is expected to significantly affect Indian startups and local investment firms.

Here’s what startups need to know from the latest budget. Key updates and reforms could reshape the entrepreneurial landscape and investment environment.

Government Abolishes Angel Tax to Ease Compliance Burden and Support Startup Growth

To further support the growth of emerging entrepreneurs, the government announced removing the angel tax for all types of investors. This tax, imposed on funding raised by unlisted companies exceeding their fair market value, has been a significant burden for startups. Effective April 1, 2024, startups issuing shares will be exempt from taxation on investments received beyond their fair market value.

The abolition of the angel tax, a persistent issue for over a decade, is expected to reduce the compliance burden on startups significantly. Previously, they had to obtain two valuation reports—one for FEMA valuation in the case of non-resident investors and another for tax fair market valuation. The Finance Minister emphasized that this move aims to strengthen the startup ecosystem, boost entrepreneurial spirit, and support innovation in the country.

“Abolition of angel tax will provide a boost to the budding Indian startup ecosystem. It will encourage the flow of capital without tax leakages, which is especially relevant at a time when the funding crunch is impacting startup liquidity. It is key to establishing India as an innovation hub and leader vs follower for new and breakthrough ideas.”

Ratna Mehta, managing partner of Fundalogical Ventures, told AsiaTechDaily while commenting on the budget.

Government Launches ₹1,000 Crore Venture Fund to Boost India’s Space Sector.

In a bid to enhance the development of India’s space economy, Finance Minister Nirmala Sitharaman announced the establishment of a ₹1,000 crore venture capital fund during her Budget presentation. This initiative aims to expand the space sector’s growth by five times over the next decade. The fund is expected to benefit over 180 government-recognized space technology startups in the country. However, details on the fund’s managing entity or investment strategy were not disclosed.

“The 1000 Cr fund of funds for space tech is a testimonial to India’s capability in coming up with breakthrough solutions at low cost. This will certainly help space tech companies to look for much-needed early-stage capital to get started. This will certainly help mobilize over Rs 4000 Cr, great move,” Anil Joshi, Unicorn India Ventures, commented. 

The new venture capital fund aligns with the government’s goal of opening the space sector to private players and attracting Foreign Direct Investment (FDI). This move is part of a strategic effort to foster deep-tech innovation and support the space economy’s expansion in India.

Government to Establish E-Commerce Export Hubs for MSMEs and Artisans

The Indian government has announced the creation of 10-15 e-commerce export hubs through a public-private partnership (PPP) model. These hubs aim to support micro, small, and medium enterprises (MSMEs) as well as traditional artisans by streamlining access to international markets. They will offer a comprehensive regulatory and logistical framework, including services such as customs clearance and warehousing.

Finance Minister Nirmala Sitharaman stated that these hubs will enable MSMEs and artisans to efficiently manage export processes and enhance their global reach. The initiative is expected to facilitate trade and export-related services under one roof, promoting broader participation in international markets.

Expansion of Digital Public Infrastructure to Boost Multiple Sectors

The Finance Minister proposed the development of Digital Public Infrastructure (DPI) applications to enhance productivity and create opportunities across various sectors, including credit, e-commerce, education, health, law and justice, logistics, MSMEs, service delivery, and urban governance. This initiative aims to drive innovation and improve service delivery at a large scale.

The proposed DPIs will build on existing platforms such as Aadhaar, UPI, and DigiLocker, and seek to address service delivery challenges in key areas. Sitharaman did not specify the financial outlay for these initiatives, but the focus is on expanding digital services to better reach and benefit the broader population.

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Anirudh A. Damani, Managing Partner at Artha Venture Fund, expressed optimism about the budget’s tax reforms, highlighting their potential positive impact on the venture capital and startup ecosystem. He noted, “As a venture capital fund, we see the Indian Budget 2024’s tax reforms as a major boost for the VC, PE, and startup ecosystem.”

“While we await the detailed budget, this move is a long-awaited positive development that will make India an even more attractive destination for global investors and drive further growth in the venture capital and private equity sectors.”

The Union Budget 2024 has introduced several measures aimed at fostering growth and innovation in the Indian startup ecosystem. Among the key reforms is the abolition of the angel tax, a move that is expected to significantly ease the burden on startups and attract more domestic and international investments. 

Additionally, the establishment of a Rs 1,000 crore venture capital fund for the space sector and the creation of e-commerce export hubs will further support the growth of emerging sectors and facilitate access to global markets for MSMEs and traditional artisans. The development of digital public infrastructure across various sectors promises to enhance productivity and create new business opportunities.

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