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Issue of Angel Tax

20th June, 2024 Economy

Issue of Angel Tax

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  • In recent years, India's startup ecosystem has emerged as a vibrant hub of innovation and entrepreneurship, attracting significant investment and fostering economic growth.
  • However, amidst this growth, the issue of Angel Tax has emerged as a contentious topic, casting a shadow over the viability and sustainability of startups in the country.

READ ALL ABOUT ANGEL TAX: https://www.iasgyan.in/daily-current-affairs/angel-tax-29


Background of Angel Tax

  • Angel Tax, initially introduced in 2012, was aimed at curbing the flow of unaccounted money into closely held companies.
  • Section 56(2)(viib) of the Income-tax Act, colloquially known as 'Angel Tax,' targets the valuation of unlisted securities issued by startups, taxing the difference between the issue price and the fair market value of these securities.

Industry's Perspective

  • From the perspective of Indian industry bodies like the Confederation of Indian Industry (CII), Angel Tax has become a significant obstacle hindering the growth and development of startups.
  • Advocates for the removal of Angel Tax argue that its presence stifles capital formation and hampers the ability of startups to attract investment, thereby impeding job creation and economic prosperity.

READ ABOUT CONFEDERATION OF INDIAN INDUSTRY (CII): https://www.iasgyan.in/daily-current-affairs/confederation-of-indian-industry-cii

Impact on Startup Ecosystem

  • The expansion of Angel Tax's scope, particularly witnessed in the Finance Bill 2023, has intensified concerns within the startup ecosystem.
  • Startups contend that valuations are often based on future potential rather than current performance, challenging the government's assertion that valuation discrepancies indicate potential money laundering activities.
  • This regulatory burden has exacerbated the challenges faced by startups, especially amidst a funding winter that began in 2022 and persisted into 2023, resulting in significant job losses and a decline in overall funding.

READ ALL ABOUT FUNDING WINTER: https://www.iasgyan.in/daily-current-affairs/funding-winter#:~:text=Funding%20Winter%20is%20a%20term,raise%20money%20at%20higher%20valuations.

Changes in Angel Tax Provisions

  • The Finance Act, 2023, brought about amendments to Section 56(2)(viib), extending the purview of Angel Tax to non-resident investors, effective from April 1, 2024.
  • This extension meant that foreign investors funding Indian startups would also be subject to taxation under Angel Tax, further complicating the investment landscape.

Exemptions and Government Response

  • Recognizing the adverse impact of Angel Tax on startup funding, the Finance Ministry took steps to exempt investors from 21 countries, including major economies like the US, UK, and France, from Angel Tax for non-resident investments in unlisted Indian startups.
  • Additionally, startups recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) were initially excluded from Angel Tax, providing some relief to the ecosystem.

Call for Action

  • The industry's call for the removal of Angel Tax underscores the urgent need for policy reforms to nurture the startup ecosystem.
  • Addressing concerns over taxation and regulatory compliance is crucial for fostering an environment conducive to investment and innovation, thereby supporting the growth trajectory of Indian startups.

Future Implications

  • The ongoing debate surrounding Angel Tax highlights broader challenges faced by startups in accessing capital and navigating regulatory hurdles.
  • Resolving issues related to taxation and regulatory compliance will be pivotal in fostering entrepreneurship and driving sustained economic growth in India's dynamic startup landscape.

READ ABOUT SLOWDOWN IN INDIA’S START-UP ECOSYSTEM: https://www.iasgyan.in/daily-current-affairs/slowdown-in-the-indian-startup-ecosystem

READ ABOUT START-UP ECOSYSTEM IN INDIA: https://www.iasgyan.in/sansad-tv-air-summaries/special-startup-ecosystem-in-india#:~:text=India%20is%20one%20of%20the,hospitality%2C%20entertainment%2C%20and%20retail.


Q. Why are policy reforms crucial for India's startups? Discuss challenges in funding and regulations. Assess government policies' role in fostering entrepreneurship and economic growth.