What is Angel Tax?

February 3, 2023

The Section 56 (2) (vii b) in the Income Tax Act is referred to as Angel tax. These taxes are imposed on startups. Say a startup SSS sells one lakh shares to a person X. Selling price of one share is Rs 5000. Now SSS gains 50 crores. Say the actual market value of the share is Rs 2000 per share. So 20 crore rupees is the actual market value. SSS made 30 crores of rupees profit. So SSS has to pay angel tax on the 30 crores rupees!

Why is Angel Tax in News?

During Union Budget 2023, Finance Minister Smt Nirmala Sita Raman proposed to amend the Angel tax. Now, the equity amount received by the startups will be subjected to income taxes and not angel taxes. Meaning, the entire 50 crores of rupees, that is, the total amount the startup received by selling the shares is subjected to income tax! Earlier, only 30 cores were subjected to taxes.

What are startups saying about the change?

Startups are disappointed. Most of the investors of the startups, that is, the share buyers are from foreign countries. Already startup investments have been decreasing. In 2022, it fell by 33%. The new change in Angel Tax is to further affect the startup investment.

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