What is angel tax for startups ?
Angel Tax is a term basically used to refer to the income tax payable on the capital raised by unlisted companies via the issue of shares through off-market transactions. To operate an early-stage venture, every startup needs funds. This leads them to look for investors. In this scenario, it is the easiest to get angel investors on board, rather than huge venture capital firms as the angel investors are high net worth individuals that are always looking for investment opportunities, that helps startups in growing.
Angle Tax is paid on the funds raised by unlisted companies through the issuance of shares in off-market transactions, if they exceed the fair market value of the company. Fair market value (FMV) is the price of an asset when buyer and seller have reasonable knowledge of it and are willing to trade without pressure. The objective behind angle tax was to was to prevent money laundering issues.
Angel tax exemption for startups:
Angel Tax is levied at a rate of 30.9% on net investments in excess of the fair market value. Earlier, it was imposed only on investments made by a resident investor. However the Finance Act 2023 proposed to extend angel tax even to non-resident investors.
An angel tax causes a startup to lose a significant portion of its investment. The majority of startups cannot afford to lose this amount of money, especially in the initial phase. So the Government implemented some relaxations in the 2019 Union budget.
Not all startups can claim this tax exemption. Only the following entity can apply for angel tax exemption in India:
- The paid-up capital and share premium of the startup should not exceed Rs. 10 crore after issuing shares.
- The startup should procure the fair market value certified by a merchant banker.
- The investor should have a minimum net worth of Rs. 2 crores and the average income in the last 3 financial years should not be less than Rs. 50 lakh.
- The startup should have received approval from a 8 member interministerial board for angel tax exemption.
Startup unlisted if receives equity investment from a resident for issue of shares that exceeds the face value of such shares, it will be counted as income for the startup and be subject to income tax under the head ‘Income from other Sources’ for the relevant financial year. With the latest amendment, the government had proposed to also include foreign investors in the ambit, meaning that when a startup raises funding from a foreign investor, that too will now be counted as income and be taxable.
India is the one of largest start-up hub in world in terms of number of business promotion. While government aims to achieve Make in India concept, but start-up sector is facing tax scrutiny which is unnecessary and dangerous for the financial health of businesses. Since the introduction of Angel Tax, Startup’s has impacted largely on Angel investments. Startups tend to lose a significant amount of money in the form of taxes as angel tax requires them to share a significant part of the investment.
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Note: This Post was last updated on December 12, 2023
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