Angel Tax

Why in news?

• Recently, the Finance Bill of 2023 proposed to amend the Section of the Income Tax Act which might affect Start-Ups funding in India.
• The new age firms, that offer their shares to foreign investors, may have to pay ‘angel tax’, which was earlier only supposed to be paid for investments raised by resident Indian investors.

Angel Tax:

• Angel tax is a term used to refer to the income tax payable on capital raised by unlisted companies via the issue of shares where the share price is seen in excess of the fair market value of the shares sold.
• The excess realisation is treated as income and taxed accordingly.
• Section 56(2) VII B of the Income Tax Act, colloquially known as the ‘angel tax’ was first introduced in 2012.
• The provision states that: 
  • When an unlisted company, such as a start-up, receives equity investment from a resident for issue of shares that exceeds the face value of such shares, it will be counted as income for the start-up and be subject to income tax under the head ‘Income from other Sources’ for the relevant financial year.
• The provision aims to deter the generation and use of unaccounted money through the subscription of shares of a closely held company at a value that is higher than the fair market value of the firm’s shares.

Changes by the Finance Bill, 2023:

• However, with the latest amendment, the government has proposed to also include foreign investors in the ambit, meaning that when a start-up raises funding from a foreign investor, that too will now be counted as income and be taxable.
• For example, if the fair market value of a start-up share is Rs 10 apiece, and in a subsequent funding round they offer it to an investor for Rs 20, then the difference of Rs 10 would be taxed as income.

PRACTICE QUESTION

‘Angel Tax’, sometimes seen in news, refers to:

(a) A tax imposed on unexpected profits or gains that result from unforeseen circumstances, such as a surge in commodity prices, sudden natural resource discoveries, or changes in tax laws that create windfall gains for certain individuals or corporations.

(b) An income tax payable on capital raised by unlisted companies via the issue of shares where the share price is seen in excess of the fair market value of the shares sold

(c) A system of tax payment in India where taxpayers are required to pay their taxes in advance, in installments, rather than in a lump sum at the end of the year

(d) A tax levied on companies that show a book profit but pay little or no tax due to deductions and exemptions.

Answer