The Indian start-up ecosystem long suffered from the short-end of the regulatory stick. Many of the benefits that were bestowed to all companies were denied to unlisted companies due to legacy reasons. Chief amongst these were: Capital gains at twice the rate of listed securities and angel tax. Budget 2024 helped plug these two issues while announcing more rationalisations.

Capital Gains Differential

Start-ups have long suffered a tax rate that was more than twice the rate of their listed counterparts. Investments in start-ups are mainly in the form of primary capital infusions, with the funds being used by the start-up for new asset creation, hiring new employees, launching new products and services.. The majority of the sales in the listed market are between two investors, with the company not directly benefiting from these share sales. Tax policy has always guided investments into new asset creation by having tax incentives or lower tax rates. However, India chose to tax these investments at twice the rate of sales between two investors in the stock market.

Furthermore, the tax rate for non-residents was half the tax rate for residents investing in unlisted startups. This along with Angel Tax has prompted many Indians to shun investing in startups, resulting in over 85 per cent of the capital raised by Indian start-ups emanating from foreign sources. This is why the funding winter has been ongoing for start-ups as global investors pull back, all the while the stock markets have boomed as SIP flows from Indian investors crossed Rs 19,000 crore a month into mutual funds.

The government has finally plugged this differential by applying a uniform Long-term Capital Gains tax rate of 12.5 per cent for resident and non-resident investors, as well as for listed and unlisted securities. This will prompt greater rupee participation in start-ups and lead to stronger flows to Indian AIFs.

The removal of indexation is a cause of concern. However, a 37.5 per cent reduction in the unlisted LTCG rate from 20 per cent to 12.50 per cent balances out the Cost Inflation Indexation CAGR of 5.76 per cent over the last 20 years. This is especially important for securities, although property investors may feel a pinch

Removal of angel tax

Angel tax is a uniquely Indian solution to a global problem of money laundering. It was introduced in 2012 under a series of measures titled “prevention of the generation and circulation of unaccounted funds”. What was an anti-abuse measure became a tax harvesting section as startups who issued shares at a premium saw the taxman comparing their projections vs their actual performance and taxing the difference! Missing projections is a commercial risk, not a taxable event.

Despite numerous changes, exemptions, etc, Angel Tax remained an albatross across the neck of Indian start-ups. This removal without conditions is a major boost for Start-up India.

GIFT IFSC Changes

AIFs in GIFT IFSC can look forward to a Variable Capital Company (VCC) Structure, a globally recognized and accepted vehicle for investment funds. Trusts were not conceived for the complex operations of VC/PE funds and the VCC structure will make GIFT IFSC even more attractive. The Section 68 exemption to GIFT IFSC

AIFs, on par with SEBI AIFs, is a welcome move. Section 68 seeks to tax unexplained cash credits and was linked to the Angel Tax section. The lack of exemption to GIFT IFSC AIFs was an oversight which has been rectified.

Budget 2024 has set the tone for the new NDA government. The mantra of “rationalisation and simplification” is off to a strong start. This will kickstart a new cycle of capital investments and new asset creation amongst start-ups and unleash market spirits.

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