What are the New Rules of Angel Tax?
Recently, Angel tax was in the news. It was because the Indian Government has specified new rules pertaining to Angel Tax. These new rules will now exempt registered startups of a specified size from the tax. So before knowing about the new rules in detail, let us first know what is angel tax first?
What is Angel Tax?
Angel tax is a tax on income or we can say it is an income tax levied at 30.9% tax on investments made by external investors in unlisted startups or companies. Angel tax will only be applicable if companies have raised capital through the sale of shares at a value above their fair market value. Now, here the question arises that what is Fair Market value? Fair Market Value is that price for which a property would sell in an open market. FMV represents the price/Accurate valuation of an asset.
Angel tax got introduced in the 2012 Finance Budget with a motive to curb down money-laundering through the sale of shares of unlisted private companies at extremely raised prices.
Recently, the government has announced new rules regarding Angel Tax; let us understand here what they are-
- The government has broadened the definition of startups in its new rules. Now, an eligible startup should be registered with the government and should be incorporated for less than 10 years and should have a turnover not exceeding Rs. 100 crore over that period.
- These startups can apply for the tax exemption if its paid-up capital is up to Rs. 25 crores, compared to Rs. 10 crores earlier.
Start-ups are allowed to raise tax-free capital from two types of investments-
- listed companies having a net worth of INR 100 Crore orat leastturnover of 250 crores.
There are certain restrictions imposed by the government on investments by the start-ups. The startup has to attest the fact that it has not invested in any land that’s not being used in its ordinary course of business, any vehicle over the value of Rs 10 lakh, any jewelry etc.
There is also a requirement that startups must be registered with the department for the promotion of industry and internal trade.
Criticism of Angel Tax
Many times Angel tax has gone through a lot of criticism because of Angel tax values startups based on their assets alone. Also, the IT department many times arbitrarily decides the fair value of a company’s share. It results in harassing genuine startups. For startup founders, taxes such as Angel tax become a discouragement for investment.
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Today, we got to know about the Angel Tax, how it works and benefits the investors and startup founders and what is its criticism. Angel tax was started as a step of government to curb the money laundering and corruption but somewhere it started hampering the genuine startup founders.