Angel Tax
Why in News ?
- Recently, the Central Board of Direct Taxes (CBDT) has taken this step amid notices being sent to startups. Angel taxes are tax funds raised by startups if they exceed the fair market value of the company.
With Reference to Angel Tax:
- The provision known as ‘Angel Tax’ was initially introduced in 2012 to discourage the generation and use of unaccounted wealth through investments in closely owned companies.
- Angel tax is a tax paid by unlisted companies when they receive funds from angel investors through share issuance.
- Companies that perform very well operationally use their brand value to obtain funding and issue shares at prices higher than fair market value.
New proposal on Angel Tax:
- This tax is related to the premium received. If an Indian unlisted company receives additional premium on sale of shares to a foreign investor, the premium is treated as “income from other sources” and is taxable.
- Before this proposal in Budget 2023-24, angel tax was levied only on investments made by resident investors.
Proposed Changes in Assessment Rules of Angel Tax:
- Amendment is necessary in the Finance Bill, 2023. In this, it has been proposed to amend Section 56(2) VII B of the Income Tax Act.
- In this, foreign investors will be included in the tax net. When a start-up raises funds from a foreign investor, this will also be counted as income and taxable after amendment.
- However, this consideration should not exceed the total consideration received from the notified entity within 90 days of the issue of shares.
- There are some exceptions, such as it mentions that foreign investors will not have to pay any angel tax when investing in government-recognized (Department for Promotion of Industry and Internal Trade (DPIIT) registered) startups in India.
Who are Angel Investors?
- Angel investors are high net worth individuals who invest their personal income in business start-ups or small and medium scale companies.
- Angel investors are usually entrepreneurs, who may also be friends or relatives of the person starting the startup company.
- Angel investors believe in the company’s founders as well as their business concept and provide the capital needed to set up the company, usually at easier terms than other lenders.
Source – Indian Express
