Govt Mulls Angel Tax Deferral for Startups Until April 2024, New Provisions in the Offing

Angel Tax in India Update: In a recent move, the Indian government has proposed amendments to the Finance Bill, which could potentially defer the implementation of the contentious Angel Tax for startups until April 2024.

As per the new provision, investors who pay a premium amount exceeding the fair market value (FMV) of shares of an unlisted company will be liable to pay a tax at a rate of 20% or more. The provision has implications for unlisted companies, who will now be held responsible for the tax liability of such premium payments.

This move aims to curb instances of money laundering and unaccounted money generation in unlisted companies, but it also raises concerns over the impact on startups and investors in India. The provision has received mixed reactions from industry experts and is likely to have far-reaching consequences for the investment landscape in the country.

The government has now proposed to bring foreign investors under the ambit of the angel tax which hitherto applied to Indian residents and funds not registered as Alternative Investment Funds (AIFs).

The objective of introducing the section was to deter the generation and use of unaccounted money through subscription of shares of a closely held company, at a value which is higher than fair market value.

What does the Angel Tax say

The Angel Tax, also known as the Section 56(2)(viib) of the Income Tax Act, was introduced in 2012 to curb the circulation of black money in the economy. However, it has been a subject of controversy for several years, with startups arguing that it unfairly penalizes them for receiving investments from angel investors.

The proposed amendments to the Finance Bill, which were announced during the Union Budget presentation for the financial year 2022-23, seek to provide relief to startups from the Angel Tax. The changes could potentially allow startups to raise funds without attracting the Angel Tax, provided they meet certain criteria.

The amendments suggest that startups that have been registered for less than ten years and have a turnover of less than Rs 100 crore will not be subjected to the Angel Tax. Additionally, startups that fulfill the above criteria and have received investment from a Category I or Category II Alternate Investment Fund (AIF) will also be exempted from the tax.

The move has been welcomed by the startup community, which has been advocating for a complete repeal of the Angel Tax for several years. However, some experts have noted that the proposed amendments do not address all the concerns raised by startups, and that further reforms may be necessary to create a more conducive environment for entrepreneurship in India.

The government’s decision to defer the implementation of the Angel Tax until April 2024 could provide a much-needed respite to startups, which have been facing a challenging fundraising environment due to the COVID-19 pandemic. It remains to be seen how the startup ecosystem will respond to the proposed changes and whether they will have a lasting impact on the Indian startup landscape.

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