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Angel Tax

2023 MAY 25

Preliminary   > Economic Development   >   Budgeting   >   Taxation

Why in news?

  • The Central Board of Direct Taxes (CBDT) has announced a proposal to exempt certain categories of investors from the levy of angel tax.
  • The move aims to encourage investments in start-ups and ease the burden of taxation. Additionally, the CBDT has introduced five new valuation methods for resident investors, expanding the options beyond the Discounted Cash Flow (DCF) and Net Asset Value (NAV) methods.

About 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.

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.Consider the following statements: Angel Tax

Answer

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