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Did You Know: What is Angel Tax? | RBI Grade B 2021

Angel Tax

In good news for the start-ups, the Income Tax Department has given an exemption to start-ups from angel tax even on earlier assessment orders, subject to certain riders.

So what is Angle tax and what was the row all about? Let’s understand

Meaning

The angel tax is an income tax payable on the capital raised by an unlisted firm through the issue of shares over and above their fair market value. The excess realisation (i.e. over and above the fair market value) in the capital raised is treated as income and taxed.

For example, if an unlisted company raised Rs.10 crore and the fair market value should be Rs.8 crore, the excess Rs.2 crore is treated as income for the unlisted company and therefore liable for taxation. This tax on Rs.2 crore is termed as Angel tax as this capital is usually invested by Angel investor in start-up companies.

Angel tax is applicable only in case the investor is a resident Indian. This means, any investment made by a foreign angel investor or by a VC fund will not be subject to angel tax.

 

Scope for Angel Tax

In order to promote entrepreneurship and start-ups, the government widened the scope of exemption from angel tax as follows:

  Earlier New
Definition of start-ups An entity up to 7 years from date of incorporation ·         An entity up to 10 years from date of incorporation
Exemption from Angel Tax Unlisted start-ups having a funding cap up to Rs.10 crore ·         Unlisted start-ups having a funding cap up to Rs.25 crore

·         If shares are issued by eligible start-ups to listed firms having a  net worth above Rs.100 crore or an annual turnover of or above Rs.250 crore

 

Recent Contention

These new measures provided protection from future income tax notices, but the clarity on the fate of start-ups that had already come under the department’s radar because of the earlier provisions was missing. The Central Board of Direct Taxes (CBDT) said that those start-ups which had already received tax demand notices may be granted relief at the appeals stage.

The result of contention

For instance, these start-ups can’t invest in realty; loans and advances; shares and securities; a motor vehicle, aircraft, yacht or any other mode of transport, the actual cost of which exceeds Rs.10 lakh and jewellery, etc.

However, if a start-up’s usual business model involves investment in jewellery (jewellery start-ups, for example), it can invest in it.

 

The assessing officer (AO) will conduct inquiries and verification into other issues only after obtaining approval of the supervisory officer for:

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About the Author Prachi Agarwal:

Prachi Agarwal is an MBA (Finance) from BIMTECH, Noida and B. Com (Hons) from Hansraj College, Delhi University. She has previously worked with CARE Ratings. At ixamBee, she is faculty for Financial and Management and Securities Market Awareness. Her expertise topics are Ratio analysis, risk management, bond valuation, etc. She is the student’s favorite faculty for her easy to understand approach while teaching in Live Classes.

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