Angel Tax on Startup Entities
Angel tax in India refers to a tax levied on funds raised by Indian startups through equity dilution. The tax was introduced in 2012 as part of the Income Tax Act, and it applies to any amount raised by a startup from an Indian resident at a premium to the fair market value of its shares. The premium is considered as income for the startup, and it is taxed at a rate of 30%.
The purpose of the angel tax was to prevent money laundering and other illicit activities, but it has been criticized for discouraging investment in startups and hindering the growth of the Indian startup ecosystem. In 2019, the Indian government announced a series of reforms to ease the burden of angel tax on startups, including raising the threshold for exemption and creating a dedicated cell to address grievances related to the tax.
The angel tax in India has been a controversial issue since its introduction in 2012. While the tax was originally intended to curb money laundering and other illicit activities, it has been criticized for being too broad and for hindering the growth of the Indian startup ecosystem.
Under the angel tax, any investment made in a startup by an Indian resident at a premium to its fair market value is subject to taxation. This includes investments made by angel investors, venture capitalists, and other investors. The premium amount is treated as income for the startup, and it is taxed at a rate of 30%.
The tax has been particularly burdensome for startups that are not yet profitable, as they may not have enough revenue to cover the tax liability. This has led to many startups being unable to access the funding they need to grow their businesses. Some startups have even had to shut down as a result of the tax.
In response to these concerns, the Indian government announced a series of reforms in 2019 aimed at easing the burden of angel tax on startups. The reforms included raising the threshold for exemption from the tax, creating a dedicated cell to address grievances related to the tax, and streamlining the approval process for startups seeking tax exemptions.
The threshold for exemption from the angel tax was raised from INR 25 crore to INR 50 crore, which meant that startups with a total investment of up to INR 50 crore were exempt from the tax. In addition, startups that had been registered for less than 10 years and had a turnover of less than INR 100 crore were also eligible for the exemption.
The creation of a dedicated cell to address grievances related to the angel tax was also a significant step. The cell was established under the Department for Promotion of Industry and Internal Trade (DPIIT) and was tasked with resolving issues related to the tax within 45 days of receiving a complaint.
The government also streamlined the approval process for startups seeking tax exemptions. Previously, startups had to apply for exemption from the tax with the Central Board of Direct Taxes (CBDT), which could be a lengthy and cumbersome process. Under the new system, startups could simply self-certify their eligibility for the exemption.
While these reforms were a step in the right direction, some in the Indian startup ecosystem continue to push for the complete elimination of the angel tax. They argue that the tax is unnecessary and that it is stifling innovation and growth in the startup ecosystem.
In addition, some argue that the angel tax is unfair compared to the tax regimes in other countries. For example, in the United States, startups are allowed to raise funds at a premium without being subject to a similar tax. This has led to concerns that the angel tax is making it harder for Indian startups to compete on a global scale.
Despite these concerns, the Indian government has taken steps to reduce the impact of the angel tax on startups. For example, it has expanded the scope of the tax exemption to cover more startups and has clarified the process for claiming the exemption. However, the tax remains in place, and it is likely that the government will continue to face pressure to reform or eliminate it in the coming years.
Overall, the angel tax remains a contentious issue in India’s startup ecosystem, and it will be interesting to see how it evolves in the years to come. While the government’s recent reforms were a positive step, many in the startup ecosystem believe that more needs to be done to support the growth of Indian startups and to ensure that they can compete on a global scale.