Introduction
Angel tax is a term that has been causing a lot of headaches for startups and investors in India. It refers to the tax that is levied on the capital raised by unlisted companies through the issue of shares at a price higher than their fair market value. In this article, we will take a closer look at what angel tax is, why it exists, and its impact on the startup ecosystem.
What is Angel Tax
Angel tax is a tax introduced by the Indian government to curb money laundering and black money generation. The tax is applicable to startups that have raised capital through the issue of shares to angel investors at a premium. The premium amount is considered as income in the hands of the startup and is taxed at a rate of 30%.
Why Does Angel Tax Exist
The primary reason for the existence of angel tax is to prevent the practice of inflating the value of shares and laundering money through the investment in unlisted companies. By taxing the premium amount, the government aims to ensure that startups are not used as a means to convert black money into white.
Impact on Startups
Angel tax has been a major concern for startups in India as it significantly reduces the amount of capital they can raise. Many startups have had to shut down or move their operations overseas due to the high tax burden. This has had a negative impact on job creation and innovation in the country.
Case Study: Flipkart
One of the most prominent examples of the impact of angel tax is the case of Flipkart. The e-commerce giant was slapped with a tax demand of over Rs 110 crore for the funds raised from angel investors. This led to a prolonged legal battle and uncertainty for the company.
Recent Changes
In a bid to ease the burden on startups, the Indian government has made some changes to the angel tax regulations. Startups that are registered with the Department for Promotion of Industry and Internal Trade (DPIIT) are now exempt from angel tax up to a certain limit. However, there are still concerns about the implementation of these changes.
Conclusion
Angel tax continues to be a contentious issue in the Indian startup ecosystem. While the government has made some efforts to address the concerns of startups, more needs to be done to ensure a conducive environment for innovation and entrepreneurship. It is essential for the authorities to strike a balance between curbing misuse of funds and supporting the growth of startups.
