Mains Paper 3: Economy | Effects Of Liberalization On The Economy
From the UPSC perspective, the following things are important:
Prelims level: Angel Tax
Mains level: Interventions required by the government to diversify India’s startup’s financing
- The government has decided to set up a five-member working committee to look into the angel tax issue and come up with guidelines in one week.
What is angel tax?
- The ‘angel tax’, as it is commonly called, is a tax on the excess capital raised by an unlisted company through the issue of shares over and above the fair market value of those shares.
- This excess capital is treated as income and taxed accordingly.
- It most commonly affects start-ups and the angel investors who back them.
Who is an Angel Investor?
- An angel investor is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity.
- It is also known as a business angel, informal investor, angel funder, private investor, or seed investor.
Problems with Angel tax
- There is no definitive or objective way to measure the ‘fair market value’ of a startup.
- Investors pay a premium for the idea and the business potential at the angel funding stage.
- However, tax officials seem to be assessing the value of the startups based on their net asset value at one point.
- Several startups say that they find it difficult to justify the higher valuation to tax officials.
- In a notification in May, 2018, the CBDT had exempted angel investors from the Angel Tax clause subject to fulfillment of certain terms and conditions, as specified by the DIPP (now DPIIT).
- Earlier, start-ups whose aggregate amount of paid-up share capital and share premium after the proposed issue of share does not exceed ₹10 crore are eligible for exemption from the tax.
- Officials representing the government agreed to raise this limit to ₹25 crore.
- They also agreed to amend the definition of a start-up to include companies that have been in operation for up to 10 years rather than the previous limit of seven years.
- The notification had said that the angel investor should have filed IT returns of at least ₹50 lakh for the year preceding the year in which the investment was made and have a net worth of ₹2 crore.
- This would be modified to be ₹25 lakh and ₹1 crore, respectively.
Scrapping Angel Tax is not possible
- The government is concerned about how to differentiate genuine start-ups from companies set up for money-laundering purposes.
- The angel tax could not be scrapped as money laundering is a major problem.
- There was a network of 200 shell companies and they have been under control since 2012, so it cannot be scrapped.
- However, concessions are under consideration with the size of the start-up, the duration of its operation, and the income of the angel investor.