ANGEL TAX (Syllabus: GS Paper 3 – Economy)

Context: Amid a downturn in startup funding and resultant job losses, Indian Inc has urged for the repeal of Angel Tax. 

Angel Tax

• About: An income tax levied, when an unlisted company issues shares to an investor at a price higher than its fair market value.
• Under: Under Section 56(2)(viib) of the Indian Income Tax Act.
• Tax rate: The effective rate of the angel tax is 30.6%.
• Aim: To curb the practice of issuing shares at a premium much higher than their fair value, which could potentially involve money laundering or tax evasion.
• Applicability: Angel Tax was applicable to startups and unlisted companies that raised capital through the issue of shares.

oIf the issue price of the shares exceeded the fair market value, the excess amount was treated as income and taxed according.

• Exemptions: The entity should be a DPIIT recognized Startup; Aggregate amount of paid up share capital and share premium of the Startup after the proposed issue of share, if any, does not exceed INR 25 Crore.
• DPIIT Recognition: 

oStartups seeking exemption from Angel Tax were required to be recognized by the DPIIT. 

oThe criteria for recognition included innovation, scalability, and the potential to generate employment.

• Eligibility Criteria for Startup:

oTurnover should be less than INR 100 Crores in any of the previous financial years.

oAn entity shall be considered as a startup up to 10 years from the date of its incorporation.