The impact angel tax has brought to startups in India
By Team Startupcity | Tuesday, 21 February 2023, 09:17 IST
India's angel tax has been a contentious topic for a while. It was first implemented in India under Section 56(2)(viib) of the Income Tax Act, 1961, with the intention of serving as an anti-abuse mechanism to stop money laundering and the transportation of illicit funds under the pretext of entrepreneurship.
Since then, companies and investors claim that the tax laws are capricious, nebulous, and confusing, which causes them to be harassed by tax authorities without cause. Even when the investments were made at fair market value and in compliance with all applicable rules, start-ups have frequently received letters and requests for payment of the angel tax. The Indian government recognised this problem and put up a number of solutions to deal with it. Under specific restrictions, the government announced in February 2019 that startups are free from the angel tax.
The startup must be acknowledged by the Department for Promotion of Industry and Internal Trade (DPIIT) and approved by the Inter-Ministerial Board (IMB) in order to qualify for the angel tax exemption. Additionally, the investment must be made by an angel investor who is registered with the Securities and Exchange Board of India (SEBI) and should not exceed the fair market value of the startup's shares.
The distinction that previously allowed foreign investors to be exempt from the provisions of the angel tax has been eliminated with the Budget of 2023, which has levelled the playing field for domestic investors but alarmed startups who worry that there will soon be a shortage of foreign funding as a result.
The DPIIT also lays out a set of requirements for startup registration. The startup must have issued and paid-up capital of no more than 25 crores, be registered as a private limited company, a partnership firm, or a limited liability partnership, and have had annual revenues of no more than Rs 100 crore in any of the prior fiscal years.
Also, the firm cannot have been created solely by the dissolution or rebuilding of an existing business or by the simple transfer of assets to a new corporation. A business can only be referred to be a startup for the first 10 years that it is in operation, it further states. If the business satisfies the aforementioned requirements, it will be qualified to receive an angel tax exemption, pending IMB approval.
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