Centre may relax angel tax norms for start-ups, sets up panel

Note4students

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


News

  • 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?

  1. 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.
  2. This excess capital is treated as income and taxed accordingly.
  3. It most commonly affects start-ups and the angel investors who back them.

Who is an Angel Investor?

  1. An angel investor is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity.
  2. It is also known as a business angel, informal investor, angel funder, private investor, or seed investor.

Problems with Angel tax

  1. There is no definitive or objective way to measure the ‘fair market value’ of a startup.
  2. Investors pay a premium for the idea and the business potential at the angel funding stage.
  3. However, tax officials seem to be assessing the value of the startups based on their net asset value at one point.
  4. Several startups say that they find it difficult to justify the higher valuation to tax officials.
  5. 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).

Proposed reforms

  1. 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.
  2. Officials representing the government agreed to raise this limit to ₹25 crore.
  3. 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.
  4. 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.
  5. This would be modified to be ₹25 lakh and ₹1 crore, respectively.

Scrapping Angel Tax is not possible

  1. The government is concerned about how to differentiate genuine start-ups from companies set up for money-laundering purposes.
  2. The angel tax could not be scrapped as money laundering is a major problem.
  3. There was a network of 200 shell companies and they have been under control since 2012, so it cannot be scrapped.
  4. However, concessions are under consideration with the size of the start-up, the duration of its operation, and the income of the angel investor.
Tax Reforms
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