ANGEL TAX
1. Context
A recently proposed detail has Indian start-ups worried. These new-age firms, that offer their shares to foreign investors, may have to pay "angel tax", which was earlier only supposed to be paid for investments raised by resident Indian investors, as per a motion made in the Finance Bill, 2023.
The move could adversely impact financing available to the start-ups, which have already been reeling under a funding winter since 2022, industry insiders are speculating.
2. The Proposed Change
- The Finance Bill, 2023, has proposed to amend Section 56(2) VII B of the Income Tax Act.
- The provision states that when an unlisted company, such as a start-up, receive equity investment from a resident for the 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 under the head "Income from other Sources" for the relevant financial year.
- However, with the latest amendment, the government has 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.
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For instance, 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.
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- 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 the closely held company at a value that is higher than the fair market value of the firm's shares.
3. Start-ups Concerns
- The change comes as the funding for India's startups dropped by 33 per cent to $24 billion in 2022 as compared to the previous year, according to a PwC India report released in January.
- Foreign investors are a key source of funding for start-ups and have played a big role in increasing the valuation.
| For instance, Tiger Global, one of the most prolific foreign investors in India has invested in over a third of the start-ups that have turned unicorns with a valuation of at least $1 billion. |
- Non-resident investors were never under the scope of this tax.
This could compel more startups to flip overseas, as foreign investors may not want to deal with additional tax liability through their investment in the startup. - The reintroduction is completely counter-intuitive to the entire move of reverse-flipping. This will accelerate flipping overseas.
For Prelims & Mains
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For Prelims: Angel Tax, Section 56 (2) VII B of the Income Tax Act, Start-ups, Finance bill 2023
For Mains:
1. What is Angel Tax and discuss the reasons for start-ups' concerns in India (250 Words)
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Source: The Indian Express
