Budget 2024: Good News for Start-Ups as Nirmala Sitharaman Abolishes Angel Tax. Here’s What It Means
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Union finance minister Nirmala Sitharaman with a red pouch carrying the Budget documents on July 23. (Image: PTI/Atul Yadav)
Angel Tax is used to refer to the income tax payable on the capital raised by unlisted companies via the issue of shares through off-market transactions
Finance Minister Nirmala Sitharaman on Tuesday brought cheer for start-ups as she abolished angel tax in the Union Budget 2024-25 for all classes of investors.
WHAT IS ANGEL TAX?
Angel Tax is used to refer to the income tax payable on the capital raised by unlisted companies via the issue of shares through off-market transactions.
Under Section 56(2) VII B of the Income Tax Act, the premium received on the sale of shares to a foreign investor is considered “income from other sources” and therefore, taxed accordingly.
It was in 2012 that the tax was first introduced by then finance minister Pranab Mukherjee under the UPA-II regime to check the laundering of funds.
In April 2018, the government issued a notification to give exemption to start-ups under Section 56 of the Income Tax Act in cases where the total investment including funding from angel investors did not exceed Rs 10 crore.
For the exemption, start-ups were also required to get approval from an inter-ministerial board and a certificate of valuation from a merchant banker, Economic Times reported.
When introduced, investments by a venture capital fund or company in a venture capital undertaking were kept outside the ambit of angel tax. Thereafter, the government provided relaxation to certain start-ups as recognised by Department for Promotion of Industry and Internal Trade (DPIIT) and having share capital (inclusive of share premium) lower than Rs 25 crore, pursuant to new issue.
In 2023, the government provided further relaxations to investors including government and government related investors, banks, entities in insurance business and certain categories of investors based in 21 jurisdictions as notified by it.
WHO DOES IT IMPACT?
Apart from start-ups, particularly those in early stages that rely heavily on external funding, the tax affects angel investors as the implications may make them more prudent about putting their money in start-ups.
WHY WAS THE INDUSTRY AGAINST IT?
For start-ups that are fledgling, the angel tax was an impediment as raising money often became an issue. The industry was also against angel tax as it was levied on any premium paid over the “fair market value” of shares, potentially leading to disagreements on valuation between startups and tax authorities.
Stay informed with our comprehensive coverage of Union Budget 2024. Get the latest on new income tax slab rates for AY 2024-25 in Income Tax Slabs Budget 2024 LIVE Updates . Track the impact of Budget 2024 on the stock market in Stock Market Budget Day 2024 LIVE Updates. Watch Union Budget LIVE Streaming here
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