What is Angel Tax and Why Was it Introduced?
Angel Tax, introduced in 2012 under Section 56(2)(viib) of the Income Tax Act 1961, was a tax levied on the amount raised by startups from angel investors when the funding exceeded the fair market value of shares.
The difference was considered as “income from other sources” and taxed at around 30.9%. The primary intention behind this tax was to curb money laundering and prevent the circulation of black money through inflated valuations in unlisted companies.
What Were the Major Concerns Surrounding Angel Tax?
Primarily, this tax caused notable distress to startups who had to justify their valuations to tax authorities, often leading to protracted legal battles and financial strain.
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Additionally, the scrutiny involved in proving the source of funds and the credibility of investors was burdensome and deterred both domestic and foreign investments.
Has Angel Tax Been Abolished?
Yes, as part of the Union Budget 2024-25, the Indian government completely abolished Angel Tax for all classes of investors.
This decision was a response to years of lobbying by the startup community and investors, who argued that the tax was counterproductive and hindered the growth of the entrepreneurial ecosystem in India.
Who Benefits from the Abolition of Angel Tax?
The abolition of Angel Tax benefits a broad range of stakeholders, including startups, who can now raise funds without the fear of punitive taxation on valuations that exceed market value and Investors like Angel investors, venture capitalists, and other early-stage investors who now face fewer regulatory hurdles and can invest with greater confidence.
What Were the Criteria for Angel Tax Exemptions Before Its Abolition?
Before the abolition, startups had to meet stringent criteria to be exempt from Angel Tax, given as follows
DPIIT Recognition: The Department for Promotion of Industry and Internal Trade’s (DPIIT) recognition was necessary for the startup for the exemption.
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Paid-up Share Capital: The total paid-up share capital and share premium after the proposed investment could not exceed ₹25 crore.
Valuation Reports:The startup needed a valuation report from a certified merchant banker to substantiate its fair market value.
What Impact Did Angel Tax Have on Foreign Investments?
Angel Tax especially posed notable challenges for foreign investors. The lack of clarity and the risk of retrospective taxation made India a less attractive destination for foreign venture capitalists and private equity funds. The abolition of Angel Tax is expected to ease these concerns, making India a more welcoming environment for global investors.
Read More:How does Abolishment of Angel Tax Impact Investment Ecosystem of India?
What Was the Tax Rate for Angel Tax Before Its Abolition?
The tax rate for Angel Tax was around 30.9%, which included a 30% basic tax and an additional 3% cess.
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