What is Angel Tax? Why is CII Seeking its Removal

Indian Inc. is encouraging the elimination of the Angel Tax in response to a sharp fall in startup investment and the associated loss of jobs. This contentious tax has gained a lot of attention since the Finance Bill 2023 increased its purview.

In its Union Budget proposals, the Confederation of Indian Industry (CII) recommended the government to eliminate the so-called "Angel Tax," or section 56(2)(viib) of the Income-tax Act. According to the CII, this action will greatly increase the nation's capital formation.

Origins and Purpose of Angel Tax

The Angel Tax was implemented in 2012 with the intention of reducing the amount of unreported income generated and utilised. It does this by taxing investments made in tightly held businesses at prices more than the shares' fair market value. But since then, the government and entrepreneurs have been at odds over this tax.

The Industry's Stance

Industry insiders argue that the government misreads the discrepancy between initial estimates and real performance as proof of potential money laundering. They emphasise that investors evaluate a startup's future prospects in addition to its present success when determining how much money to invest in it. Funding attempts have apparently been hindered by the Angel Tax, which is imposed on the difference between the issue price of unlisted securities and their fair market value. This has occurred at a time when more than 100 Indian firms were forced to fire over 15,000 workers in 2023, and the value of financing fell by more than 60% from the previous year.

Expansion of Angel Tax in Finance Act 2023

Section 56(2)(viib) of the Income-tax Act underwent major modifications as a result of the Finance Act 2023. It said the extra sum would be treated as income and liable to income tax under 'Income from other sources' if an unlisted firm, such a startup, received equity investment from a resident that exceeded the face value of its shares.

Impact on Foreign Investments

Angel Tax was formerly limited to investments made by residents. But as of April 1, 2024, non-resident investors are now included in this as well, due to the Finance Act of 2023. This implies that foreign investments in startups in India will likewise be treated as income and subject to appropriate taxation.

Exemptions and Industry Pushback

The Department for Promotion of Industry and Internal Trade (DPIIT)-recognized startups were initially exempt from this tax. After strong opposition from the industry and a noticeable drop in funding, the Finance Ministry exempted investors from 21 countries, including the US, UK, and France, from the Angel Tax on non-resident investments in unlisted Indian startups.

However, key investment hubs like Singapore, Netherlands, and Mauritius were notably excluded from this exemption, despite being traditional sources of startup funding.

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