What is Angel Tax in India?

Angel Tax is a term used to describe the tax levied on the money raised by unlisted companies through the issue of shares to Indian residents when the price of the shares is higher than their fair market value. This tax is aimed at curbing money laundering, but it has created significant challenges for startups.

Background

Angel Tax was introduced in 2012 to prevent money laundering through inflated share prices. It applies when a startup receives investments from an angel investor at a price higher than the fair market value of the shares. The excess amount is considered income and taxed at around 30%.

Impact on Startups

1. Financial Burden: Startups often receive investments at a premium because of their growth potential. Angel tax can become a financial burden as it taxes the excess amount.
2. Valuation Issues: Startups and tax authorities often disagree on the valuation of shares, leading to disputes.
3. Investor Reluctance: The fear of angel tax can deter investors from investing in startups, reducing the available capital for new ventures.

Government’s Response

The Indian government has taken steps to ease the impact of angel tax on startups:

1. Exemptions: Startups recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) and meeting certain criteria are exempt from angel tax.
2. Simplified Process: The process for claiming exemption has been simplified.
3. Valuation Flexibility: Startups can use different methods to justify their share valuation.

Recent Changes

In the Union Budget 2023, the government announced further measures:

1. Higher Threshold: The investment limit for exemption was raised to ₹50 crores.
2. Foreign Investments: Clarifications were made regarding the applicability of angel tax to foreign investments.
3. Dispute Resolution: A new mechanism was introduced to resolve valuation disputes.

These steps are aimed at creating a more supportive environment for startups and investors, while still addressing concerns of tax evasion and money laundering.

For continuous updates on angel tax and its impact on startups, you can refer to sources like Economic Times and Business Standard.