What is Angel Tax?

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What is Angel Tax? Blog Image

Overview:

A senior government official recently said that the 'angel tax' provision in the Finance Bill will not impact startups in India.

Why in News?

  • The Finance Bill 2023 has proposed some changes that will remove the exemption for foreign funds and non-resident investors, who will now have to pay Angel Tax on the difference between capital raised and the fair value of securities sold.

About Angel Tax:

  • What is it? It is levied on the capital raised via the issue of shares by unlisted companies from an Indian investor if the share price of issued shares is seen in excess of the fair market value of the company.
  • The excess funds raised at prices above fair value is treated as income, on which tax is levied.
  • It derives its genesis from section 56(2)(viib) of the Income Tax Act, 1961. 
  • It was introduced in 2012 to prevent black money laundering through share sales.
  • The Angel Tax is levied at a rate of 30.9% on net investments in excess of the fair market value. 
  • In 2019, the Government announced an exemption from the Angel Tax for startups on fulfillment of certain conditions. These are,
  • The startup should be recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) as an eligible startup.
  • The aggregate amount of paid-up share capital and share premium of the Startup cannot be more than ₹25 crores. This amount does not include the money raised from Non-Resident Indians (NRIs), Venture Capital Firms, and specified companies.
  • For angel investors, the amount of investment that exceeds the fair market value can be claimed for a 100% tax exemption. However, the investor must have a net worth of ₹2 crores or an income of more than ₹25 Lakh in the past 3 fiscal years.
  • Eligibility Criteria for Startup Recognition:
  • The Start-up should be incorporated as a private limited company or registered as a partnership firm or a limited liability partnership.
  • Turnover should be less than INR 100 Crores in any of the previous fiscal years.
  • An entity shall be considered a Start-up up to 10 years from the date of its incorporation.
  • The Start-up should be working towards innovation/ improvement of existing products, services, and processes and should have the potential to generate employment/ create wealth.
  • An entity formed by splitting up or reconstruction of an existing business shall not be considered a “Startup”.

 


Q1) What is a listed company?

A company that's "listed" makes shares of its stock available for purchase on a stock exchange.

The meaning of "listed" also implies that a company is "public" because its shares are readily available to anyone who wants to buy them

Source: "Angel Tax" Provisions In Finance Bill Won't Affect Startups: Official