What is Angel tax?

Why in News? Amid a sharp decline in funding for startups and consequent job losses, Indian Inc has sought the removal of Angel Tax that has been a subject of heated debate between the industry and the government ever since the scope of the controversial tax was expanded in the Finance Bill 2023.

What is Angel  Tax?

Angel tax refers to the income tax levied on the funds raised by unlisted companies in India, specifically when the investment amount exceeds the fair market value of the company’s shares. It’s essentially a tax on the premium paid by investors for the shares.

Why is it called Angel Tax?

• The term “angel” refers to angel investors, who are typically high-net-worth individuals who provide early-stage funding to startups and small businesses. Since Angel Tax applies to such investments exceeding fair market value, the name stuck.

How is Angel Tax Calculated?

The tax is levied at a hefty rate of 30.9% on the investment amount that surpasses the fair market value of the company’s shares.

For example:

• A startup issues shares at Rs. 1000 each.
• The fair market value of the company is determined to be Rs. 500 per share.
• An investor buys 10,000 shares at Rs. 1000 each (Rs. 10,000,000).
• The premium paid by the investor is Rs. 500 per share (Rs. 1000 – Rs. 500).
• Angel Tax will be applicable on Rs. 5,000,000 (10,000 shares * Rs. 500 premium).
• The tax amount payable would be Rs. 1,545,000 (30.9% of Rs. 5,000,000).

Criticisms of Angel Tax:

• Discourages Investment: The high tax rate discourages angel investors from providing crucial funding to startups, hindering their growth potential.
• Difficulty in Determining Fair Market Value: Accurately determining the fair market value of an unlisted company can be challenging, leading to disputes with tax authorities.

Relaxations and Exemptions:

Recognizing the challenges, the government introduced some relaxations and exemptions:

• Startup Exemption: Startups registered with the Department for Promotion of Industry and Internal Trade (DPIIT) can be exempt from Angel Tax if they meet specific criteria, such as a maximum paid-up capital and share premium limit.
• Investor Criteria: For startups to claim exemption, the investors should meet certain criteria related to minimum income or net worth.