What Is Angel Tax

Angel Tax in India: A Comprehensive Guide

What is Angel Tax?

Angel tax is a tax imposed on unlisted companies when they receive funding from angel investors or venture capitalists. It is levied on the difference between the fair market value (FMV) of the shares and the issue price of the shares.

Legal Basis of Angel Tax

Section 56(2)(viib) of the Income Tax Act, 1961 introduced the concept of angel tax to curb money laundering and tax evasion.

Impact on Startups

The imposition of angel tax poses a significant challenge for startups in India. It discourages angel investors from investing in these companies, which hinders the growth and development of the start-up ecosystem.

CII Recommendation

The Confederation of Indian Industry (CII) has recommended scrapping Section 56(2)(viib) of the Income Tax Act to promote a more supportive environment for startups.

Government Initiatives

In recent years, the government has taken steps to address the concerns raised about angel tax. These initiatives include:

• Providing clarity on the valuation of shares
• Establishing a Start-up India Hub to facilitate investment
• Exempting certain startups from the angel tax

Conclusion

While the angel tax was initially introduced to curb tax evasion, it has had unintended consequences for the Indian start-up ecosystem. The government's recent initiatives and the support of industry bodies like CII aim to create a more conducive environment for startups to flourish.