September 6, 2019
5 min read
This article sheds some light on the concept of angel tax and its implications on startups in India.
The startup ecosystem has started to favour entrepreneurship and innovation, with the government providing numerous benefits and schemes for startups in terms of subsidies, tax benefits and loans. However, one thorn in this balanced ecosystem that has been troubling startups founders for the past few years is Angel Tax or the devil’s tax as called by some. This article sheds some light on the concept of angel tax and its implications on startups in India.
Angel tax is a tax levied on the funds raised by a startup from Angel Investors in India or abroad. The concept of angel investment was introduced in 2012 under Section 56(2)(viib) of the Indian Income Tax Act, 1961. At present, India levies a 30% angel tax on the funding received by Indian startups from angel or individual investors.
The provision states that any consideration received by a startup will be held as the income of the business when the shares are issued to a resident of India at a price more than the market value of such shares. However, any funds raised by a startup from Venture Capital Funding rounds will not be covered under this definition and will not be subject to angel tax in India.
Startup founders and entrepreneurs can talk to the best financial consultants in India to know more about the concept of angel tax in India.
Angel tax has given nightmares to hundreds of startups that has raised funding through angel investors. The primary issue related to angel tax in India is the harassment of startups and excess scrutiny by tax authorities. The other issue associated with angel tax is the ‘Fair Market Value’ of the startup.
The tax authorities allow calculation of the tax to be paid by the startup more than the startup valuation or FMV. This has led to startups being overtaxed for the angel funding they raised for the business and getting harassed and legally implicated by the authority for tax evasion.
The tax authority sent notices to various startups for defaulting on their tax payment and even went after the angel investors. Legal notices were sent in bulk to hundreds of startups under Section 68 of the Income Tax Act, defining the funding as an unexplained income liable for taxation. A considerable decline has been seen in angel investments and seed funding after the issues created by the concept of angel tax, which in turn, has led to a decrease in innovation and an increase in the closing down of startups.
After an uproar by the startup community, the government paid heed to this issue and to promote the startup ecosystem, it introduced certain exemptions in 2016 to the levy of angel tax in India:
The paid-up capital and share premium of the startup must not be more than INR 10 crore after issuing the shares.
The angel investor must have a net worth of at least INR 2 crores.
The average income of the angel investor for the last three financial years must not be less than INR 50 lakhs.
Previously, there were two additional conditions to be eligible for an exemption from angel tax which stated that:
The startup must receive a Fair Market Value Certificate from a Merchant Banker.
The startup must have received approval from an 8-member inter-ministerial board for angel tax exemption.
However, these conditions were done away by the government to simplify the concept of angel tax in India.
To claim exemption from angel tax in India, a startup needs to file an application with the Department of Industrial Policy & Promotion (DIPP) along with the required documents. DIPP then forwards the application and documents to the Central Board of Direct Taxes (CBDT). CBDT then has to decide upon the application and accept or reject it within 45 days. Before applying to claim exemption from angel tax, startup founders must talk to experienced startup consultants in India to know more about their eligibility and applicability of the tax.
SeekWiser has a wide network of domain-expert startup mentors and advisors in India, who can advise, guide and help startups on their liability to pay angel tax on any funds raised from angel investors. Call SeekWiser's at +91-8010880066 or send us an email at [email protected] to get .
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