First thing, which comes into mind before starting startups is funds, and normally questions come in mind that how to approach potential investor who are ready to invest in our idea.
Everyone knows this fact that it is hard to convince anyone to invest his money in our idea. Being startup, it is difficult initially to go for an IPO and some other sources.
Angel investors are those investors who prefer to invest in small startups. Usually, angel investors are among an entrepreneur's family and friends. The angel investors provide may be a one-time investment to aid the business to propel or an ongoing injection of money to support and carry the company through its difficult early stages.
Even the govt is supporting the start-ups in India to do in-house Research and Development and to support this idea govt was mulling to abolish angel tax to cap the angel investment in start-ups which was introduced in few year back.
Due to the problem with the current tax regime, most of the start-ups are being incorporated overseas.
Under the current tax regime, if start-ups which are incorporated as a private limited company or public limited company issue shares to individuals at a price which is in excess of fair market value, then that excess prices shall be treated as Income from other sources that would be taxable at a rate 33.33%. If we understand this with the help of an example, then we can say start-ups need funds of Rs 2 Crore, they actually have to raise Rs. 3 Crore. I hope you got the idea of this whole issue by this example.
This is the main cause of exodus of technology-based start-ups for seeking better regulatory regime.
Therefore, the Government ,now finally, this move will not only lure the domestic Angel investor but it catalyses FDI by attracting venture capital funds as well. Now, funding to start-ups is not going to face angel tax even if it exceeds the face value.
It is definitely a time for domestic angel investors which were not registered as a venture capitalist to have a sigh of relief because it was a big deterrent to investments.