Finance Minister Nirmala Sitharaman presented the budget for 2024-25 on Tuesday. This is the first budget of the third term of the Modi government. There has been a change in the new regime of income tax in the budget. Along with this, ‘Angel Tax’ has also been abolished, so that the startup ecosystem can be promoted.
Angel tax was introduced in 2012. Pranab Mukherjee was the Finance Minister then. It was brought so that money laundering through investment in startups could be prevented.
What is angel tax?
Angel tax has been added to section 56 (2) (vii b) of the Income Tax Act. If a startup raises funds from angel investors, then this tax is levied on it. However, this means only those funds which are more than the fair market value of the startup.
Understand it this way, when a startup raises money from investors and the investment amount is more than the fair market value of the shares of the startup, then that startup has to pay angel tax.
This is because the extra value of shares is considered as income and tax is levied on this income.
Angel investors are those who take stake in the startup through funding. These are usually investors who invest their personal income in startups or small companies.
For example, if the fair market value of a startup is Rs 50 lakh and it raises Rs 1 crore from angel investors, then it will have to pay tax on Rs 50 lakh.
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Angel tax has been in controversy!
Angel tax has often been controversial. Many entrepreneurs who start a startup argue that the fair market value of a startup cannot be determined.
Startups claim that Assessing Officers (AOs) use discounted cash flows to arrive at fair market value. This causes loss to startups and benefit to the tax authority.
In 2019, a survey by LocalCircles revealed that 73% of startups that raised funding between Rs 50 lakh and Rs 2 crore have received notices to pay angel tax.
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Till now only these startups were exempted
In the general budget of 2019, the government had slightly simplified the rules of angel tax. Then the government had exempted startups registered with the Department of Promotion of Industry and Internal Trade (DPIIT) from angel tax.
However, it is said that not all startups got this exemption. Only such people were exempted from this who were certified by the Inter-Ministerial Board (IMB).
IMB is actually a government body which decides whether a startup is innovative or not and whether it is eligible to avail the benefits of income tax law or not.
According to reports, till now more than 84 thousand startups are registered in DPIIT, but only 1% of them are certified by IMB.