Angel Tax : Decoding the tax row that's making startups nervous


What is an Angel Tax?  

Angel tax is the income tax payable by a company, not being a company in which public is substantially interested (generally private companies), on the aggregate consideration received from a resident investor which is in excess of the Fair Market Value (FMV) of the shares so issued via off market transactions (provided the price of the share issued exceeds the face value of shares).

The excess consideration received is considered as an income from other sources in pursuance to section 56(2)(viib) of the Income tax Act, 1961 and is chargeable at the rate of 30%.

For instance, if your company receives an investment amount of Rs. 1,000 crores against issue of shares and the Fair Market Value of these shares is Rs. 750 crores, then the balance Rs. 250 crores shall be considered as excess amount or we can say the premium amount and shall be taxable.

 

Which investments fall under the ambit of Angel Tax?



Why are start-ups opposing it?

Start-ups exempted from paying Angel Tax

Angel Tax was introduced in the 2012 Union Budget by then Finance Minister Mr. Pranab Mukherjee to curb the laundering of funds. But the levying of Angel Tax at such a high rate had a severe impact on the Start-up ecosystem. A huge amount of investment which start-ups would have used for their growth was going in the hands of government and start-ups were left affected deeply.

That’s where the government in April 2018 came up with notification exempting the start-ups being a private company from paying angel tax. Now, a private company which has been recognised as a start-up with the Department for Promotion of Industry and Internal Trade (DPIIT) is exempt from paying Angel Tax provided it complies with the conditions of exemption as notified by the DPIIT.

Conditions for exemption from Angel Tax


Conclusion:

Although the said amendments have given certain relief to the investors as well as start-ups, there are still many challenges that start-ups and investors face in this regard. A major challenge is as per section 68, according to which a company shall be imposed too heavy tax liability in case it fails to disclose the source of this income. These impositions have hindered the growth of many start-ups, so the government needs to take more steps in order to improve start-ups’ conditions.

Regards

CA Sachin Singla

sachinsingla.ca@gmail.com

Disclaimer:

The Purposes of the article is knowledge sharing while the information is believed to be accurate to the best of my knowledge and belief. I do not make any representation or warranties, express or implied, as to the accuracy or completeness of this information. I accept no responsibilities for any errors it may contain, whether caused by negligence or otherwise or for any loss, howsoever caused or sustained, by the person who relies upon it.

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