Angel Tax

Context: Recently, the Finance Bill, 2023, has proposed to amend Section 56(2) VII B of the Income Tax Act, related to Angel tax.

About Angel Tax:

• A term used to refer to the income tax payable on the capital raised by unlisted companies.
• It is levied on the capital raised via the issue of shares from an Indian investor.
• This tax predominantly affects start-ups and the angel investments they attract.
• It derives its genesis from section 56(2) (viib) of the Income Tax Act, 1961.

Section 56(2) (viib) in the IT act:

• Introduced by the finance act, 2012
• It taxes any investment, received by any unlisted Indian company, valued above the fair market value by treating it as income.
• The investment in excess of fair value is characterized as ‘Income from other sources.
• If the fair market value of a start-up share is Rs 50 apiece, and in a subsequent funding round they offer it to an investor for Rs 60, then the difference of Rs 10 would be taxed as income.

Proposed changes

• For Angel Tax exemptions:
  • The government has exempted investments made by the domestic investors in companies approved by an inter-ministerial panel from Angel Tax.
• Criteria for exemption:
  • The paid-up capital and share premium of the startup should not exceed Rs. 10 crores 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 lakhs.
• For foreign Investors:
  • New changes include foreign investors, meaning that when a start-up raises funding from a foreign investor, that too will now be counted as income and be taxable.
  • Foreign investors are a key source of funding for the start-ups and have played a big role in increasing the valuation.

Significance of provision:

• The provision aims 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.

Source: Indian Express

Previous Year Questions

Q.1) With reference to the expenditure made by an organisation or a company, which of the following statements is/are correct? (2022)

1. Acquiring new technology is capital expenditure.
2. Debt financing is considered capital expenditure, while equity financing is considered revenue expenditure.

Select the correct answer using the code given below:

1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2

Q.2) With reference to the Indian economy, consider the following statements:

1. A share of the household financial savings goes towards government borrowings.
2. Dated securities issued at market-related rates in auctions form a large component of internal debt.

Which of the above statements is/are correct? (2022)

1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2