Angel Tax in India

Indian industries are calling for the abolition of Angel Tax, arguing that it hinders startup funding and job creation.

What is Angel Tax?

1. A tax levied on unlisted companies that raise capital by issuing shares at a price exceeding their fair market value (FMV).
2. The excess amount is considered income and taxed.
3. Originally designed to combat money laundering and black money.

Budget 2023-24 Changes:

1. Extended Angel Tax to foreign investors, except for investments in government-recognized startups.
2. Previously only applied to resident investors.

Tax Rate:

• Currently stands at 30.6%.

Recent Developments:

1. Exemptions granted to investors from 21 countries on investments in unlisted Indian startups.
2. Final Valuation Rules notified in September 2023 to address industry concerns.
3. CBDT instructed field officials not to scrutinise recognized startups for Angel Tax cases.

Industry Concerns:

1. The government's assumption that valuation differences imply money laundering is flawed.
2. Angel Tax disregards the fact that investors fund startups based on future potential, not current valuations.
3. The tax has negatively impacted funding, leading to layoffs and a decline in startup investments in 2023.

Additional Points:

1. CCPS (Compulsorily Convertible Preference Shares) are relevant for Angel Tax valuation.
2. There are currently 99,380 DPIIT recognized startups.
3. The government faces the challenge of balancing tax evasion prevention with fostering startup growth.

Conclusion:

The debate surrounding Angel Tax highlights the tension between preventing tax evasion and promoting a thriving startup ecosystem. While recent developments aim to alleviate industry concerns, further reforms remain a topic of ongoing discussion.

 

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