Angel Tax in India: What is Angel Tax?

As an informed Indian, you would agree to the fact that India has fast emerged as the forerunner for creating and offering entrepreneurship opportunities. Recent government initiatives such as the Make in India campaign, and Business Loan Schemes such as StartUp India, Stand-up India, and MSME/PSB Loan under 59 minutes has pushed this status quo even further. So much has been the impact of these schemes and campaigns that High worth individuals, Venture Capitalists and Angel Investors from across the globe are being gravitated to this new found spirit for promoting entrepreneurship.

That being said, a certain measure called the Angel Tax has, until recently, been perceived as detrimental to the entrepreneurial world. The Angel Tax was introduced back in the year 2012, as a measure to curb money laundering via small companies. However, the bulk of the tax, as well as the Central Board of Direct Taxes’ sudden move in 2018 of deducting income tax under Section 68 directly from the bank accounts of some start-ups pertaining to unexplained cash credits, has created a negative atmosphere around this tax.

Following this jagged move by the CBDT, start-ups across the nation waged a protest with the #ShutDownIndia trending on Twitter in early February 2019. This caught the attention of the Government of India, who gauged the deleterious vibe amongst start-ups and quickly worked towards bringing in some much sought after reforms in the same by mid-February 2019.

The companies that qualified as ‘Start-Up’ are now entitled to avail Angel Tax break. Moreover, contrary to the earlier guideline where an entity was considered to be a start-up for only 7 years, it would now be considered so for up to 10 years from the date of its incorporation. In addition, the upper limit for tax-exempt Start-Ups’ turnover has been increased from Rs. 25 crore earlier to Rs. 100 crore.

Now that you have a fair idea about Angel Tax, let us dive deeper and understand the nitty-gritty of this tax in India.

Who is an Angel?

Angels are essentially those people, usually high net-worth individuals, who invest in early-stage start-ups in exchange for equity. Given that the Angels invest in the enterprises right at the ideation stage, they run a huge risk of losing out on their money. However, this risk propensity is combated by the fact that that if successful, the enterprise can yield phenomenal returns for the investor.

What is Angel Tax?

Angel Tax is the income tax levied on the capital raised by unlisted companies, through the way of issuing shares via off-market transactions. While this may seem to be a simple tax, what makes it unique is the fact that the tax is only levied if the investor is an Indian citizen and if the share price of issued shares is in excess of the company’s fair market value. Here, this excess value is considered as income and is therefore deemed taxable. This income is categorised under the head’ Income from Other Sources’.

Angel Tax was introduced under the Finance Act, 2012, under Section 56 (2) (viib).

Investments under the Ambit of Angel Tax

As mentioned earlier, Angel Tax is only levied on investments made by an investor who is a resident Indian. This tax is not applicable in cases where non-resident Indians make the investments, and where the investment is made via venture capital funds.

Angel Tax Exemption

In a bid to alleviate the concerns of the Start-Up owners across the nation, the government has introduced tax exemptions on investments pertaining to domestic investors, for enterprises which have the approval of a special inter-ministerial panel comprising of as many as 8 members. However, this exemption will only be available for Start-Ups which meet the following criteria-

After the issuing of shares, the paid-up capital complete with a share premium of the start-up should not exceed Rs. 10 crore.

The fair market value of the start-up must be certified by a Merchant Banker.

The minimum networth of the investor should be Rs. 2 crore.

The average income of the investor in the last 3 financial years should be Rs. 50 Lakh or more.

However, the procedure for gauging tax exemption was perceived as complex, which lead the government to issue a new notification which dissolves two conditions namely –

The fair market value of the start-up must be certified by a Merchant Banker.

The start-up must be approved by a special 8-member inter-ministerial panel.

As of today, all that a start-up needs to do is simply place a request for Angel Tax exemption from the Department of Industrial Policy & Promotion (DIPP), complete with supporting documents.

The DIPP will then forward qualifying applications to the Central Board of Direct Taxes, complete with the relevant documents. The CBDT will then accept or reject the application based on its assessment with a span of 45 days from the date of receipt.

Angel Tax Rate

At present, a substantial rate of 30.9% is levied as Angel Tax on net investments in excess of the fair market value of the business entity.

Hence, if a Start-Up with a fair market value of Rs. 15 crore receives an investment of Rs. 25 crore, by issuing 1 Lakh shares of Rs. 2,500 each, it will have to pay the Angel Tax on the excess Rs. 10 crore, amounting to a whopping Rs. 3.09 crore!

While it is understandable that some Start-Ups may perceive the Angel Tax as an added burden and even a disruptive one, but it will certainly help in bringing down the rampant money laundering through small companies that have been long-running malpractice in the Indian economy.