Angel Tax

Angel Tax

Angel Tax:

• • The term “angel tax” primarily refers to the income tax that must be paid on the capital that unlisted businesses raise through the issuance of shares through off-market transactions. 
  • If the share price of issued shares is seen to be higher than the fair market value of the company, this tax is imposed on the capital raised by unlisted companies from Indian investors or foreign investors from specific countries. 
  • The excess realization is treated as income and is therefore subject to taxation. 
  • For instance, if a start-up share has a fair market value of Rs. 10 per share and an investor is offered one for Rs. 20 during a subsequent funding round, the Rs. 10 difference would be subject to income tax. 
  •  The term “angel tax” refers to the affluent people, or “angels,” who make significant initial investments in start-ups and hazardous, unproven business ventures when they are still relatively unknown.

What is the justification for the Angel Tax? 

• • The Income Tax Act of 1961’s Section 56(2)(viib) describes the Angel Tax rule.
    In order to stop the laundering of illicit funds through round-tripping through investments into unlisted companies at a high premium, this clause was added to the act in 2012.
    

Budget 2023 – 24 and Angel Tax

• • Investments that were formerly subject to the Angel Tax before Budget 2023–2024 was introduced 
  • Prior to the 2023–24 budget, only investments made by residents were subject to angel tax.
  • For example, it did not apply if venture capital funds or non-resident investors made the investments. 
  • Allaying the worries of the startup community, the government also announced that domestic investors’ investments in businesses that were approved by an interministerial panel would not be subject to the angel tax.
  •  That is to say, startups that were recognized by the government and met certain requirements would not be subject to this tax. 
  • Modifications to the angel tax included in the Budget 2023–2024 
  • The Income Tax Act’s Section 56(2) VII B is proposed to be amended by the Finance Bill, 2023.
  • In light of this, the government has suggested extending the scope to foreign investors. 
  • This implies that receiving funding from an overseas investor will also be considered income and subject to taxes for start-ups. 
  • In contrast to domestic investors, these foreign investors will not be required to pay any angel tax when funding an Indian startup that has received government recognition. 
  • The so-called angel tax will not be applied to investors, either domestic or foreign, who fund a startup that is registered with the DPIIT. 
  • The tax rateAngel tax is currently imposed at a rate of 30.6%.
    

Notifications of late concerning the angel tax

• • Investors from 21 nations are granted exemptionsThe Finance Ministry waived the angel tax for non-resident investments in unlisted Indian start-ups made by investors from 21 nations, including the US, UK, and France, as of May 2023. 
  • The list, however, did not include investments from nations like Mauritius, Singapore, or the Netherlands. 
  •  Final guidelines for domestic and international investors in valuation 
  •  The Finance Ministry announced in September 2023 the final valuation guidelines under the new angel tax mechanism for both domestic and foreign investors in unlisted businesses, such as start-ups. 
  • The regulations addressed an additional subclause of compulsorily convertible preference shares (CCPS) in order to address the industry’s concerns. 
  • After a predetermined date, CCPs, a particular kind of preferred stock, can be converted into a set number of equity shares of the issuing company. 
  • It said that the fair market value of unquoted equity shares may also be used as the basis for CCPS valuation.
    

News Summary: 

• • CBDT clarifies angel tax for startups 
  • Field officials have been instructed by the tax department not to verify “recognised” startups in cases involving Section 56 (2) (viib) of the Income-tax Act.
  • The DPIIT has recognized 99,380 startups. 
  • Additionally, arguments made by these well-known startup companies on the matters will be summarily accepted in proceedings that are auto-generated.
  • They might, nevertheless, need to be verified for additional tax-related matters. 
  • The tax department issued this clarification in response to concerns expressed by numerous startups regarding the receipt of scrutiny notices related to angel tax. 
  •  A lot of startups were notified in accordance with Section 56(2)(viib). 
  • They were requested to provide their stakeholders’ income tax returns (ITRs) for the previous three years in a row.