Angel Tax (Download PDF)

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Angel Tax is a 30 % tax that is levied on the funding received by startups from an external investor. This 30 % tax is levied when startups receive angel funding at a valuation higher than its ‘fair market value’. It is counted as income to the company and is taxed. This tax was introduced under section 56 (2) (viib) to counter money laundering.

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This is image show in Amgels in Ditress

Angel Tax Overview

  • No definitive or objective way to measure the ‘fair market value’ of a startup.

  • A premium is paid by the Investors for the idea and the business potential at the angel funding stage.

  • The tax officials seem to be assessing the value of the startups based on their net asset value at one point.

  • Startups find it difficult to justify the higher valuation to tax officials.

  • On May 24,2018, the Central Board of Direct Taxes (CBDT) had exempted angel investors from the Angel Tax clause subject to fulfilment of certain terms and conditions, as specified by the Department of Industrial Policy and Promotion (DIPP), renamed as the Department for Promotion of Industry and Internal Trade. There are a host of challenges that startups are still faced with, in order to get this exemption.

Suggested Reforms

  • The government is planning to raise the limit of tax exemption to 25 crore from 10 crore. Previously the start-ups whose aggregate amount of paid-up share capital and share premium not exceed 10 crore were eligible for this tax exemption

  • The Angel tax couldnot be removed or scrapped beacause of the money laundering being a major problem. There is a network of 200 shell companies and they have been under control since 2012, which further makes this tax impossible to scrap.

  • Few changes might be seen in context with the size of the start-up, the duration of its operation, and the income of the angel investor.

- Published/Last Modified on: July 19, 2019

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