What is Angel Tax?
Angel tax refers to income tax levied on capital raised by unlisted companies through the issuance of shares in off-market transactions, particularly affecting startups receiving investments from angel investors where the investment amount exceeds the fair market value of the company’s shares.
What does Angel Tax do?
Contained in Section 56(2)(viib) of the Income Tax Act, 1961, angel tax treats any investment received by an unlisted Indian company in excess of its fair market value as income from other sources, thereby levying tax on it. Introduced in the Finance Act of 2012 during the UPA-2 regime led by Finance Minister Pranab Mukherjee, this provision primarily targets angel investors who support startups.
The levy of angel tax was a contentious issue among the Indian startup community, leading to demands for its rationalisation. Startup ventures funded by resident Indians were subject to this tax, while ventures backed by venture capital or non-resident investors were exempt from it.
What is Angel Tax Rate in India?
In this framework, startups receiving investments in excess of their fair market value face a significant angel tax rate of 30.9%. This tax is levied under Section 56(2)(vii)(b) of the Income Tax Act, 1961, with an additional 3% cess, resulting in a total effective rate of 30.9%. Startups seeking funding must deposit this angel tax to the Income Tax Department.
What are new Reforms in Angel Tax?
Recent reforms are aimed at stimulating the Indian startup ecosystem by reducing the tax burden, promoting international investment and fostering research and innovation through adequate financing initiatives. These measures, along with efforts to enhance energy security and provide targeted incentives for startups, that are set to sustain the momentum and boost innovation across various sectors.
In short, while angel tax posed a regulatory challenge in the past, the ongoing reforms now aim to strike a balance between tax compliance and promoting a conducive environment for entrepreneurial growth in India.
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