Angel Tax Rules
Source: The Hindu
GS II: Economy
Overview
- News in Brief
- What is angel tax?
Why in the News?
The Indian government has eased certain provisions of the angel tax introduced in the recent Budget, specifically targeting investments into startups by non-resident investors at a premium over their fair market value.
News in Brief
- It has introduced five different valuation methods for shares and offered a 10% tolerance for deviations from the accepted share valuations.
- As per a notification issued by the Central Board of Direct Taxes on Monday, Rule 11UA under the Income Tax Act has been amended, with some changes to the draft norms released in May, bringing some relief to prospective foreign investors in startups.
- The amended rule brings in more clarity for both investor and investee, basis which an appropriate valuation method can be adopted, reducing the chances of any future litigation.
What is angel tax?
- Angel tax refers to the taxation of capital raised by unlisted companies, primarily startups, through the issuance of shares at a premium over their fair market value.
- The tax authorities in India have been concerned about startups issuing shares at a premium that exceeds their fair value, viewing such premiums as taxable income for the startups.
- This taxation practice has led to disputes and challenges for startups and investors, as valuing early-stage companies can be subjective and complex.
- To address this issue, the Indian government has introduced various measures and changes to the angel tax regulations over the years.
- These measures aim to provide relief to startups and investors by raising the threshold for exemptions and introducing valuation guidelines to reduce tax disputes.
- The goal is to create a more favourable environment for startup growth and investment, making it easier for innovative companies to raise capital without facing heavy taxation.
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