Angel Tax

Angel Tax

What is the News?

• The Department for Promotion of Industry and Internal Trade and Central Board of Direct Taxation are likely to increase the exemption threshold for startups from the so-called Angel Tax.
• Under the new rules, companies whose share premium does not exceed Rs 25 crore will get immunity from the taxation. The earlier limit was Rs 10 crore.

What is Angel Tax?

• It is a term used to refer to the income tax payable on capital raised by unlisted companies via issue of shares where the share price is seen in excess of the fair market value of the shares sold.
• Angel tax is imposed on the excess share capital raised by an unlisted firm, over and above the fair market value of its shares.
• This tax usually impacts startups and the angel investments they attract.
• While aimed at curbing money-laundering, the angel tax has also resulted in a large number of genuine startups receiving notices from the IT Department.
• Startups would have to furnish three types of documents in order to be registered with the government:
  • audited financials for the previous year,
  • IT returns for the previous year, and
  • a self-certified declaration.
• Once these documents are furnished, the DPIIT would have to validate them, and then submit the name and PAN of all these companies to the CBDT.

Is an exemption available from this tax?

• The government has decided to raise the maximum time limit below which a firm would be deemed eligible for angel tax exemption to 10 years from the earlier seven.
• Further, the paid-up share capital threshold below which startups would be eligible for an exemption has been set at ?25 crore.
• In cases where the investment exceeds ?25 crore, the firms would be eligible for exemption if the angel investors can prove a net worth of ?2 crore or more in the previous financial year.
• For investments below ?25 crore, no questions would be asked.