Introduction
Angel tax is a term that has been making headlines in India’s startup ecosystem. It refers to the tax levied on investments made by angel investors in startups. In recent years, the issue of angel tax has become a major concern for startups and investors alike.
Understanding Angel Tax
Angel tax is imposed under Section 56(2)(viib) of the Income Tax Act, 1961. According to this provision, if a closely held company issues shares at a premium which exceeds the fair market value, the excess amount is considered as income and taxed at 30.9%.
Challenges Faced by Startups
Startups often receive funding from angel investors who inject capital into the company in exchange for equity. However, the valuation of startups is subjective and determining a fair market value can be challenging. Many startups end up receiving angel tax notices from the Income Tax Department, leading to disputes and legal battles.
Case Studies
One of the most well-known cases of angel tax is that of the online marketplace Flipkart. The company faced scrutiny over its valuation and received a demand notice for over INR 600 crores in angel tax. This case sparked a debate on the need for reforms in the tax system for startups.
Government Reforms
In response to the outcry from the startup community, the Indian government has taken steps to address the issue of angel tax. In 2019, the government announced that startups will not be required to pay angel tax on investments up to INR 25 crores. This move was welcomed by the industry as a step in the right direction.
Impact on Startup Ecosystem
Angel tax has had a significant impact on the startup ecosystem in India. Many startups have struggled to raise funds due to the fear of attracting angel tax liabilities. Investors have also become cautious about funding startups, leading to a slowdown in the growth of the ecosystem.
Conclusion
Angel tax continues to be a contentious issue in India’s startup landscape. While the government’s recent reforms have provided some relief to startups, there is still a need for further clarity and transparency in the tax system to support the growth of the startup ecosystem.
