Angel Tax

Recently, the Union Minister for Finance proposed to abolish ‘angel tax’ for all classes of investors, while presenting the Union Budget 2024-25 in Parliament.

About Angel Tax:

•   It was levied on the capital raised via the issue of shares by unlisted companiesfrom an Indian investor if the share price of issued shares is seen in excess of the fair market value of the company.
•  The excess funds raised at prices above fair value are treated as income, on which tax is levied.
•   It derives its genesis from section 56(2) (viib) of the Income Tax Act, 1961.
•   It was first time introduced in 2012to prevent black money laundering through share sales.
•   It was levied at a rate of 30.9% on net investments in excess of the fair market value.
•  In 2019, the Government announced an exemption from the Angel Tax for startups on fulfillment of certain conditions. These are:

o  The startup should be recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) as an eligible startup.

o  The aggregate amount of paid-up share capital and share premium of the Startup cannot be more than ₹25 crores. This amount does not include the money raised from Non-Resident Indians (NRIs), Venture Capital Firms, and specified companies.

o  For angel investors, the amount of investment that exceeds the fair market value can be claimed for a 100% tax exemption.

o  However, the investor must have a net worth of ₹2 crores or an income of more than ₹25 Lakh in the past 3 fiscal years.

UPSC Prelims PYQ : 2020

Ques : Start-ups registered with the Department of Industrial Policy and Promotion of the Government of India are exempted from the payment of the "Angel Tax" with conditions. This tax refers to:

a)   Tax payable on capital raised by new listed start-up companies via issuance of shares where the share price is seen in excess of fair market value of shares sold.

b)  The tax that start-up were supposed to pay if they receive a loan at a discounted rate of interest because of higher success ratio.

c)   Tax payable on capital raised by unlisted companies via issuance of shares where the share price is seen in excess of fair market value of shares sold.

d)  The tax that start-ups were supposed to pay when their annual income would cross the specified threshold as per their fair market valuation

Ans : c)