Early stage entrepreneurs are happy about the possibility of the tax going away. “This move will be a game-changer for both early-stage startups and investors," said Bharat Joshi, co-founder of Bengaluru-based fintech startup VuNet Systems, adding that the move could foster a more conducive and positive environment for innovation and growth, and unlock greater opportunities for entrepreneurs.
Utkarsh Sinha, managing director of boutique investment banking firm Bexley Advisors, said that removal of angel tax would enhance ease of doing business and attract additional capital to India. “This move can help spur many sectors actively seeking early-stage capital," he said.
Section 56(2)(viib) of the Income-tax Act, commonly referred to as the ‘angel tax’, was introduced in 2012 to prevent unaccounted money from being used to invest in shares of private companies. The tax, levied at a rate of 30.6%, comes into effect when an unlisted company issues shares to an Indian investor at a price above what the tax department says is its fair market value.
According to Section 56(2)(viib) of the Income Tax Act, when an unlisted company, like a start-up, gets equity investment from a resident of India for issue of shares that exceed their face value, the excess amount is subject to income tax under the head ‘income from other sources’ for that financial year. In 2019, the government introduced an exemption for investors putting in money into startups registered with the DPIIT, so long as the aggregate of the paid-up capital and share premium of the startup after issuing shares did not exceed ₹25 crore.
Also, companies with turnover higher than ₹100 crore were not considered startups. While earlier the tax was applied only to investments
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