Angel Tax

Angel Tax

This article covers “Daily Current Affairs” and the topic details “Angel Tax”. This topic has relevance in the “Economy” section of the UPSC CSE exam.

For Prelims:

What is Angel Tax? 

For Mains:

GS3:  Economy

Why in the news?

The Income Tax Department has issued new angel tax regulations, including a system for assessing the shares that unlisted startups offer investors.


Understading Angel Tax

  • Angel Tax is a term used to refer to the tax levied on the excess consideration received by a private company for the issuance of shares above their fair market value. 
  • Introduced in 2012, this tax falls under Section 56 (2) (viib) of the Income-tax Act, 1961. 


Purpose of Angel Tax:

  • Angel Tax was introduced to prevent money laundering and generate revenue by curbing the practice of issuing shares at a high premium.
  • It aimed to differentiate between genuine investments and investments made to convert black money into white.


Mechanism of Angel Tax:

  • According to the current provisions, any consideration a private company receives for issuing shares that exceed the fair market value is taxable under Angel Tax.
  • Suppose the Assessing Officer determines that the valuation of shares issued is higher than the fair market value. In that case, the excess amount is added to the company’s income and taxed at the applicable rate.


Exemptions on Angel Tax:

  • Startups are exempt from this tax if –
    • They are registered under DPIIT and file the required declarations and returns.
    • The total combined value of the paid-up share capital and share premium of the Startup, following any proposed share issuance, if applicable, is less than INR 25 Crore.


Applicable Tax Rate:

  • Investments above the fair market value are taxed at 30.9%. The excess amount above fair market value is subject to angel tax.


Criticism and Implications:

  • Burden on Start-ups and Entrepreneurs:
      • Many start-ups face challenges in valuing their shares as it is highly subjective and depends on various factors.
      • The provision of Angel Tax burdened start-ups with the requirement of proving that the investments received were genuine and the valuation was justified. This led to increased compliance costs and legal complexities.
  • Negative Impact on the Funding Ecosystem:
      • The imposition of the Angel Tax created uncertainty and discouraged angel investment in start-ups.
      • The tax deterred domestic and foreign angel investors from investing in promising businesses, hindering the growth of the start-up ecosystem in India.
  • Reforms and Relaxations:
    • To address the concerns raised by start-ups and investors, the Indian government has taken several steps:
      • Increase in the threshold: The limit of the fair market value of shares above which Angel Tax is applicable has been increased for eligible start-ups.
      • E-verification mechanism: An online portal has been introduced to simplify verifying investments and exempt eligible start-ups from Angel Tax.


Sources: Amid startups’ funding winter, Centre seeks to soften angel tax 


Q1. With reference to Angel Tax, consider the following statements: 

  1. Angel Tax is a tax levied on the difference between the fair market value of shares issued by a private company and the consideration received for them.
  2. One primary goal of introducing the Tax was to clog down money laundering through startups. 
  3. The Tax was introduced recently in FY 2022-23. 

Which of the statements given above is/are correct?

(a) 1 and 2 only

(b) 2 and 3 only

(c) 3 only 

(d) None 

Answer: (a) 


Q2. Consider the following:

  1. Income Tax 
  2. Angel Tax 
  3. Capital Gains Tax 
  4. Securities Transaction Tax

How many of the are examples of direct taxes? 

(a) Only one 

(b) Only two 

(c) Only three 

(d) All Four 

Answer: (c)


Q3. Discuss the concept of ‘angel tax’ in India and its impact on the startup ecosystem. 

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