Even as the government made an effort to bury the angel tax, the rise in surcharge on long term capital gains (LTCG) tax has smitten start-up investors, founders and stock options holders.

If they are earning Rs 2-5 crore per annum, which many of them do, the effective LTCG tax rate is 26 per cent (see table); those earning Rs 5 crore+ will have to pay 28.5 per cent LTCG. This will discourage start-up investors and dampen the spirits.

"The most retrograde step Modi Sarkar 2.0 has taken for start-ups is the heavy tax on their potential long term gains. A bit worried about the future," tweeted Anand Lunia, managing partner at venture capital firm India Quotient.

In a series of tweets, Ritesh Banglani, partner at Stellaris Venture Partners explained why a higher tax burden creates a massive dis-incentive for investors thinking of investing in startups. "If you're an angel investor, would you rather invest in a start-up at 29 per cent LTCG or in real estate where you can avoid LTCG altogether?"

Angel investments are the lifeblood of startups. And today it's the 'most expensive' long-term financial asset available to investors, he said. "Even VC investments by domestic investors have been given a similar dis-incentive. Then we complain that all our tech startups are foreign-owned."

A foreign investor pays 10-per cent tax, whereas a domestic investor pays 29-per cent tax for 'owning the same asset'. It's a perfectly designed scheme to divert Indian capital away from startups.

The revenue generated from this will be tiny, so there can't be financial logic to this either. Assuming $5 billion of cash exits happen annually in startups, which itself is a wild overestimate, less than 10 per cent goes to domestic investors—$500 million.

If investors make 5x on exit on average, then after indexation (startups take about a decade to exit) the capital gain from the entire industry will be $300M. "The government will starve the biggest value creator in India for a measly Rs 600 corre in tax revenues," Banglani pointed out.

"An entrepreneur wanting to do business in India must find an opportunity to earn at least 30% pre-tax return on equity just to earn his capital. Do you realise that is impossible. You are saying no to do business in India," asked entrepreneur Bhavin Shah in a tweet tagging the PMO and the finance minister.