Context:
Recent amendments in 2023 and the broadened scope of the Angel tax have faced criticism due to a significant downturn in startup funding and the resulting job losses.
Relevance:
GS III: Indian Economy
Dimensions of the Article:
- What is Angel Tax?
- Expansion Under Finance Act, 2023:
What is Angel Tax?
- Introduction:
- The ‘angel tax’ was first introduced in 2012 and later expanded through the Finance Act of 2023.
- It aims to curb the generation and use of unaccounted money through investments in closely held companies.
- Definition:
- It is a tax on funds raised by unlisted companies through the issuance of shares in off-market transactions that exceed the fair market value (FMV) of the company.
- Fair Market Value (FMV):
- FMV is the price at which an asset would trade when the buyer and seller have reasonable knowledge of the asset and are willing to transact without any pressure.
Expansion Under Finance Act, 2023:
- Amendments:
- The Finance Act, 2023, amended a section of the Income-tax Act to include foreign investors under the angel tax provision.
- Current Provisions:
- If a start-up receives equity investment from a resident that exceeds the face value of the shares, it is treated as income and taxed under ‘Income from other Sources’.
- Recent Amendments:
- The rule now extends to include foreign investors, meaning start-ups raising funds from them are also subject to this tax.
- Start-ups recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) are excluded from this provision.
- Industry Pushback:
- Due to industry concerns and declining funding, the Finance Ministry exempted investors from 21 countries, including the US, UK, and France, from the Angel Tax for investments in Indian startups.
Funding Winter and Job Losses:
- Challenges in 2023:
- Indian startups faced severe funding challenges, with a reported decline of over 60% in funding compared to previous years.
- This led to layoffs affecting over 15,000 employees in the sector.
Industry Perspective on Angel Tax:
- Recommendations:
- The Confederation of Indian Industry (CII) and other stakeholders have suggested removing Section 56(2) of the Income-tax Act, 1961, commonly known as the Angel Tax.
-Source: The Hindu
