Angel Tax

Angel Tax

Subject : Economy

Section: Fiscal Policy

Concept :

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

• Angel Tax is a term basically used to refer to the income tax payable on the capital raised by unlisted companies via the issue of shares through off-market transactions.
• 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.

Changes introduced in the Budget 2023-24

• Before budget 2023-24, angel tax was imposed only on investments made by a resident investor.
• e., it was not applicable in case the investments are made by any non-resident or venture capital funds.
• The Finance Bill, 2023 has proposed to amend Section 56(2) VII B of the Income Tax Act.
• With this, the government has proposed to include foreign investors in the ambit, meaning that when a start-up raises funding from a foreign investor, that too will now be counted as income and be taxable.
• However, these foreign investors will not need to pay any angel tax while investing in a government-recognized (Department for Promotion of Industry and Internal Trade (DPIIT) registered) startup in India — similar to the provision for domestic investors.

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”.