Removal Of Angel Tax:
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.
- The Confederation of Indian Industry (CII) in its Union Budget recommendation on Tuesday suggested the removal of Section 56(2)(viib) of the Income-tax Act colloquially known as the ‘Angel Tax’ stating that the step would greatly aid capital formation in the country.
- Angel Tax was first introduced in 2012 to deter the generation and use of unaccounted money through the subscription of shares of a closely held company at a value that is higher than the fair market value of the firm’s shares.
- Angel tax – which is income tax at the rate of 30.6 per cent – is levied when an unlisted company issues shares to an investor at a price higher than its fair market value.
- Earlier, it was imposed only on investments made by a resident investor. However the Finance Act 2023 proposed to extend Angel Tax even to non-resident investors from April 1, 2024, meaning that when a start-up raises funding from a foreign investor, that too will now be counted as income and be taxable.
- The industry has argued that the government is wrong in citing the difference between valuations and actual performance as a sign of money laundering, adding that investors fund startup based on their future potential.
- Taxes levied on the difference between issue price of unlisted securities and its fair market value (FMV) has hurt funding, it said.
- The changes in the Angel Tax provisions came at a time when an estimated 100 Indian startups laid off over 15,000 employees in 2023, as funding winter that began in 2022 persisted.
- Moreover, Indian startups witnessed over 60 per cent decline in funding in terms of value in 2023.
- With the latest amendment, the government had proposed to also include foreign investors in the ambit, meaning that when a start-up raises funding from a foreign investor, that too will now be counted as income and be taxable.
