- The article provides an overview of the angel tax provisions included in the Finance Bill and announced in the Budget. It emphasises the start-up community’s
- This rule, known as the Angel Tax, is described in Section 56(2)(viib) of the Income Tax Act of 1961.
- It is essentially a capital receipts tax, which is unique to India in the global context.
- This clause was added to the act in 2012 to prevent black money laundering and round-tripping through investments with a high premium into unlisted companies.
- The tax covers investment in any private business entity, but it was only applied to startups in 2016.
Why was the angel tax enacted?
- The complexities of VC fundraising with offshore entities, multiple limited partners, and blind pools are divisive.
- There has been some money laundering or round-tripping going on.
The specifics of its levy
- The Angel Tax is a 9% tax on net investments in excess of fair market value levied on startups.
- Angel investors can claim a 100% tax exemption on any investment that exceeds the fair market value.
- The investor must, however, have a net worth of 2 crores or an income of more than 25 lakh in the previous three fiscal years.
Startups are being scrutinised.
- As more and more new-age tech startups raised venture capital funding, they came under the scrutiny of the IT department.
- These funding transactions frequently involved investors paying a premium above the face value or fair market value of securities, and thus were taxed as income for the startup.
- Between 2016 and 2019, startups lobbied the government to include exceptions that would exempt them from the Angel Tax.
Which companies are exempt?
- There is a clear provision stating that DPIIT-recognized start-ups are not covered by the proposal.
- The startup recognition process is also very straightforward, with any applicant receiving it automatically.
- The key condition for exemption, however, is that the startup’s total paid-up share capital and share premium after the issue or proposed issue of shares does not exceed INR 25 Cr.
Concerns expressed by a startup
- Compliance burden: In addition to the issue of taxation, the new rules may significantly increase the compliance burden on startups.
- Persistent sluggishness: The timing of this potential tax is particularly concerning, as it coincides with the ongoing slowdown in startup funding.
- Fear of offshoring: Entrepreneurs and investors are concerned that strict capital-receipts taxes, without adequate exceptions, will drive startups overseas.
Source: https://indianexpress.com/article/explained/explained-economics/why-proposed-change-in-angel-tax-has-rattled-indian-start-ups-8420839/