The Indian government has recently decided to remove the angel tax, a move that could help keep more Indian startups from relocating to Dubai. Finance Minister Nirmala Sitharaman announced this change on July 23, aiming to boost the growth of startups in India.
Understanding Angel Tax
Angel tax was introduced in the 2012 Union Budget. It was a tax on the money that unlisted companies raised by selling shares at a price higher than their market value. The goal was not to raise money but to limit funding and prevent money laundering, according to Sanjay Malhotra, Revenue Secretary in the Ministry of Finance.
Impact of the Tax Removal
This tax removal comes at a time when many Indian businesses are moving to Dubai. Data from Dubai Chambers shows that over 62,800 Indian companies were active members of the Dubai Chamber of Commerce by the end of the first quarter this year. Dubai is welcoming small and tech businesses from around the world, offering support through the Dubai Chamber of Digital Economy.
In the past year, the number of Indian companies joining the Dubai Chamber increased by about 30%. Just in the first three months of this year, 4,351 new Indian companies registered, more than from any other country.
The Economic Survey of last year suggested that Indian startups should return to India. It noted that the migration of startups has led to a 15% drop in economic activity in the Indian startup sector, affecting job creation, innovation, and GDP growth. Investments in Indian startups also fell, with a 20% decrease in funding and a 15% drop in deals.
Factors Beyond Taxes
While removing the angel tax is a step to retain startups in India, tax savings are not the only reason businesses move to Dubai. Sayed Munaf from Telr, a Dubai-based payment gateway provider, mentions that many companies relocate due to Dubai’s ease of doing business, scalability, and transparent regulations.
Despite improvements, India’s ranking in the World Bank’s Ease of Doing Business Index is still behind Dubai’s. India was ranked 63rd in 2021, while Dubai was 16th.
Looking Forward
With the angel tax now abolished, the Indian government hopes to address the needs of the startup community. However, more efforts are needed to keep startups in India and ensure they contribute to the domestic economy, especially as opportunities in Dubai continue to attract them.
