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Abolition of Angel Tax
Context
The Indian government has proposed the abolition of the "angel tax" across all classes of investors, aiming to bolster the country's startup ecosystem, foster entrepreneurial spirit, and support innovation.
What is Angel Tax?
- Angel tax refers to the income tax that the government imposes on funding raised by unlisted companies, or startups, if their valuation exceeds the company's fair market value.
- Introduced in 2012, it falls under Section 56 (II) (viib) of the Income Tax Act.
- This provision categorizes investments that startups receive from external investors as "income from other sources," subjecting them to a high tax rate of 30%.
Impact of Angel Tax on Startups:
- Financial Strain on Startups:Startups, often operating with limited funds, face additional financial strain due to Angel Tax. The imposed tax burden adds to their operational costs, making it challenging to allocate resources effectively.
- Valuation Disputes:Taxing investments above the "fair market value" of shares can lead to disputes regarding startup valuations with tax authorities. This discrepancy can complicate financial planning and deter potential investors.
- Deterrent to Investment:The imposition of Angel Tax creates an extra liability for startups, potentially deterring investors from funding these ventures. This reduction in investment hampers the growth and innovation that the government aims to foster in the startup sector.
More on News: Capital Gain Tax
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