Angel Tax - Chanakya Mandal Pariwar

Angel Tax

Context

  • Recently, a senior government official said that the ‘angel tax’ provision in the Finance Bill will not impact start-ups in India.

Angel Tax

  • Angel Tax is a term used to refer to a tax levied on funds raised by start-ups through the issue of shares to angel investors.
  • In India, angel tax was introduced in 2012 as a measure to prevent money laundering, but it has been a controversial issue for start-ups and investors.

About the Finance Bill, 2023

  • Finance Bill, 2023, has proposed to amend Section 56(2) VII B of the Income Tax Act.
  • Section 56(2) VII B of the Income Tax Act, colloquially known as the ‘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.
  • The provision states that when an unlisted company, such as a start-up, receives equity investment from a resident for issue of shares that exceeds the face value of such shares, it will be counted as income for the start-up and be subject to income tax.
  • For example, If the fair market value of a start-up share is Rs 10 apiece, and in a subsequent funding round they offer it to an investor for Rs 20, then the difference of Rs 10 would be taxed as income.

#UPSC PYQ 2014

  1. What does venture capital mean ?
  2. a) Short-term capital provided to industries
  3. b) A long-term start-up capital provided to new entrepreneurs
  4. c) Funds provided to industries at times of incurring losses
  5. d) Funds provided for the replacement and renovation of industries