Angel Tax

  • 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.
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