ANGEL TAX (Syllabus: GS Paper 3 – Economy)

Context: In a major relief for India's burgeoning start-ups, Finance Minister Nirmala Sitharaman announced the removal of the controversial angel tax on foreign investments, a move expected to alleviate their funding challenges.

Angel Tax

• About: It refers to the income tax that the government imposes on funding raised by unlisted companies, or startups, if their valuation exceeds the company's fair market value.
• Introduced in India: Pranab Mukherjee in 2012.
• 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.

o If 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: 

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

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

• Eligibility Criteria for Startup:

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

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