Angel Tax in India refers to a tax imposed on startups that receive funds from angel investors or venture capital firms, which are perceived to be more than the fair market value of the equity shares issued. This tax was introduced in 2012 by the Indian government as a means of preventing money laundering through the guise of investments in startups.
A startup is defined as an entity that is engaged in the development of new products, processes, or services driven by technology or intellectual property. In order to be eligible as a startup in India, the entity must meet the following conditions.
Upto a period of ten years from the date of incorporation/ registration, if it is incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India .
Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded one hundred crore rupees.
Entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.
Provided that an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’.
An entity shall cease to be a Startup on completion of ten years from the date of its incorporation/ registration or if its turnover for any previous year exceeds one hundred crore rupees.
However, the implementation of Angel Tax has faced several criticisms and controversies. Many startups have reported that the tax has resulted in significant financial burden, as the valuations of startups are often subjective and it can be difficult to determine the fair market value of equity shares. Additionally, startups are often required to provide extensive documentation to prove the legitimacy of their investments, which can be time-consuming and costly.
In response to these criticisms, the Indian government has made several amendments to the Angel Tax law. On February 19th, 2019, the Department of Promotion of Industry and Internal Trade (DPIIT) issued a notification (G.S.R 127(E)) which provided relief to startups and their investors from Angel Tax. As per the notification, startups recognized by the DPIIT and having a total investment of up to the amount of paid-up share capital and share premium of Rs. 25 crore were made exempt from the tax.
Additionally, the government introduced Section 80IAC under the Income Tax Act to provide tax exemptions for startups. This section allows startups to claim 100% tax exemption on their profits for a period of three years.
This notification was a significant step towards creating a more favorable environment for startups in India and promoting entrepreneurship in the country.
However, the recent Finance Bill 2023 proposal has announced the government's intention to impose a tax on Foreign Direct Investment (FDI) into startups. The tax rate is expected to be around 30% and is meant to apply to all FDI received by startups in the form of equity or convertible instruments. This proposal has caused significant concerns among the startup community, who are against the budget proposal and seek its amendment. Many in the startup ecosystem believe that the proposed tax will stifle innovation and entrepreneurship in the country and hinder the growth of startups. The proposal is still under review and it remains to be seen how it will be implemented and what impact it will have on the startup ecosystem in India.
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