Angel Tax is the tax levied on capital raised by a private unlisted company through the issue of shares from an Indian investor. This tax impeded startups from raising funds and became a subject of debate. However, with a shift in Government policy towards promoting startups and introducing schemes like 'Startup India' and 'Digital India', the Government 2018 announced an exemption on Angel Tax for investments made in startup companies.
Here is everything you know about who Angel Investors are, the imposition of Angel Tax, and its exemptions.
What is Angel Tax?
Angel Tax is levied under Section 56(2)(viib) of the Income Tax Act, 1961 ("IT Act") and was introduced in 2012. As per the provision, when a private company raises capital by issuing shares to a resident of India if the consideration exceeds the fair market value of the shares, it becomes liable to income tax at the rate of 30% under the head of 'income from other sources.'
Here, fair market value is estimated by looking into the company's intangible assets (goodwill, intellectual property, licenses, etc.). The purpose of Angel Tax was to prevent money laundering, but it proved detrimental to startups that rely heavily on Angel Investors for their funding.
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Exemption from Angel Tax
The levying of Angel Tax has been a highly debated issue since its introduction in 2012 because of the difficulty in calculating fair market value. Determination of the value by evaluating a company's intangible assets is subjective and thus challenging.
The Government of 2018 finally announced an exemption from the tax for startups on fulfilment of some conditions. This exemption was then implemented with the 2019 Budget.
The following conditions must be fulfilled to obtain an exemption from the levy of Angel Tax -
- The startup should be recognised by the Department for Promotion of Industry and Internal Trade as an eligible startup
- The aggregate amount of share capital and premium raised should not exceed INR 25 crores. This sum does not include investment made by a non-resident, venture capital company/fund, and any specified company as prescribed.
- For 7 years from the year in which the investment has been obtained, the startup cannot invest in specified assets (land and building [except for personal use], shares and securities, capital of other entities, jewellery and artefacts, and a mode of transportation exceeding a close of INR 10 lakh except in the ordinary course of business).
Before 2018, startups were heavily taxed for investments made by Angel Investors, while foreign investors and venture capital firms enjoyed exemption from Angel Tax.
The Government finally heeded the demands of the startup community and provided exemption to investors for investments made in startups. However, the conditions imposed to obtain the exemption are stringent, and the community is now seeking their relaxation.
Who are Angel Investors?
An Angel Investor generally refers to a wealthy person who makes investments in up and coming startups to obtain equity ownership. They are different from venture capital firms because they invest their own money.
Therefore, the tax levied on their investment is called an Angel Tax. Such tax is not levied on foreign investors or venture capital funds/companies. Angel Investors are also called seed investors, angel funders, business angels, or just informal private investors.
FAQs on Angel Tax
Q.1 What is Angel Tax?
Ans. Angel Tax is the income tax levied on private unlisted companies for the excess consideration received from the issue of shares to a resident investor above fair market value.
Q.2 What is the provision of law applicable for the levy of Angel Tax?
Ans. Angel Tax is levied under Section 56(2) (viib) of the Income Tax Act, 1961.
Q.3 When was Angel Tax introduced?
Ans. Angel Tax was introduced in 2012 through the Finance Act, 2012.
Q.4 Who are Angel Investors?
Ans. Angel Investors are wealthy persons who invest their own money in up-and-coming startups to obtain equity ownership.