Demystifying The Concept Of Angel Tax In India

FLAIR TALK|November 2019

Demystifying The Concept Of Angel Tax In India
Mythologically, Angel refers to messengers of God who help the humans in distress and are supposed to be poster face of peace and humanity in the world.
Divya Singh Rathor

“Angel” one of the most soothing words to fall on ears is dreading the start-ups in India because of the addition of word Tax to it. The word “Angel Tax”, contrary to its literal meaning, is proving to be nightmarish for Indian entrepreneurs because of the stringent regime and confusion surrounding the same. However, the addition of word “Investor” to the parent term “Angel” again brings respite to the investors.

To begin with, the tradition of “Angel Investment” is not something very new and has been prevalent practice in the world economy since time immemorial. Like the parent word “Angel”, Angel Investors are those investors who are willing to undertake the risk and invest in any start-up business, either monetarily or through their expertise. Unlike the formal venture capital, Angel Investment represents a pool of risk equity fundamental to the start-up and initial growth phases of high-potential ventures. The term “Angel” with respect to the ventures originated in the early 1900s and referred to investors on Broadway, who made risky investments to support theatrical productions. Today, the term refers mainly to high-net-worth individuals who invest in and support start-up companies in their early stages of growth. In addition to providing financing, Angels typically support the company by providing guidance and assistance with recruiting, management, networks, distribution connections, etc. Also referred to as informal or independent investors, they are said to represent the largest pool of equity capital in the US, many times larger than formal venture capital.

The investors, who invest in startups or any entrepreneurship for that matter, usually are persons with highnet worth, field expertise, experienced in business development and goodwill at times. High income and experience are the rationale behind these persons being willing to invest in rising entrepreneurs, also referred to as the start-ups and therefore are referred to as the “Angel Investors”. Unlike traditional Venture Capitals, the “Angel Investors” invest at the seeding or startup stage of an entrepreneur mostly to fill the equity gap between the fund that the start-up can secure from some financial institution or venture capital.

For the sake of convenience, it can be said that Angel Investment is oldest and most often used source of external equity for entrepreneurial firms. However, the term has caught most relevance in the past few years due to the high tax regime with respect to Angel Investments.

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November 2019