Angel Tax

Context

The department for promotion of industry and internal trade proposed relieving new businesses of angel tax.

About:

It is a 30% tax that is levied on the funding received by Startups from an external investor.
However, 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.
Angel tax was introduced in 2012, with the purpose of keeping money laundering in check.

Section 56(2) VII B of the Income Tax Act, also known as the ‘angel tax’ was first introduced in 2012 to deter the generation and use of unaccounted money through the subscription of shares of a closely held company at a value that is higher than the fair market value of the firm’s shares.

Provision related to Angle Tax under Finance Act 2023:

Amendment of Section 56(2)(viib): Finance Act 2023 modified the 'angel tax' provision to include foreign investors in start-up funding taxation.
Exemption for Recognized Start-ups: DPIIT-recognized start-ups were excluded from angel tax, sparing them from this tax liability.
Final Valuation Rules for Investors: Finance Ministry established valuation rules, including methods like DCF, for resident and non-resident investors in unlisted companies.
Exemption for Investors from Certain Countries: Angel tax was waived for investors from 21 countries, but countries like Singapore, Netherlands, and Mauritius were excluded.