By Ashwin Manikandan and Haripriya Suresh

BENGALURU (Reuters) – India on Tuesday abolished a tax it had imposed on investors pumping money into its start-ups, a move aimed at boosting innovation and increasing funding for young companies in Asia’s third-largest economy.

“To strengthen the Indian startup ecosystem, promote entrepreneurship and support innovation, I propose to abolish angel tax for all classes of investors,” Finance Minister Nirmala Sitharaman said in her budget speech.

The “angel tax”, introduced in 2012 to prevent money laundering, is causing headaches for young startups and their investors. It is a tax levied on capital raised above market value.

Tuesday’s move “removes a major hurdle and makes it easier and more attractive for investors to back early-stage startups,” said Prashanth Prakash, a partner at venture capital firm Accel.

This step, which responds to a key demand from the startup community, follows several attempts to simplify the tax.

In 2019, the government exempted start-ups registered with the Ministry of Industry and Domestic Trade Promotion from the provisions. In 2023, the tax was exempted from certain types of foreign portfolio investors, domestic banks, insurance companies and sovereign wealth funds.

“This forward-thinking move by the government removes a significant compliance burden, attracts investments and fosters an environment where startups can truly thrive,” PhonePe CFO Adarsh ​​​​Nahata told Reuters.

India’s startup industry has struggled to access growth capital of late, with data from Venture Intelligence showing that PE/VC investments in Indian companies declined by 24% in the first half of 2024 compared to the same period in 2023.

“For the past 12 years, this has been a major nuisance and a source of fear and distress among angel investors, founders and the startup ecosystem,” says K Ganesh, the man behind startups like online grocery retailer BigBasket and home healthcare provider Portea Medical.

This step will also reduce the time spent on tax-related litigation.

“Founders and investors will feel more comfortable after this change and can focus on building their companies,” said Mitul Mehta, chief financial officer of Blume Ventures.

(Reporting by Ashwin Manikandan and Haripriya Suresh; Editing by Dhanya Skariachan, Editing by William Maclean)