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Source: The post is based on the article “Budget 2023: 80,000 start-ups exempt from angel tax, says gov” published in Business Standard on 3rd February 2023
What is the News?
The Finance Minister has made several announcements related to the startup sector in the Union Budget 2023-24.
Firstly, startups “registered” with the Department of Promotion of Industry and Internal Trade (DPIIT) are exempt from the “angel tax”.
– Note: The “registered” should not be mistaken to be “certified”.The certified ones will have to pay additional taxes.
Secondly, Indian startups raising capital from foreign investors such as SoftBank, Sequoia Capital will also now have to pay angel tax. This means that now non-residents will also come under the purview of angel tax.
– Till now these provisions were applicable only to local resident investors, but the ambit has been expanded as part of the government’s anti-tax avoidance move.
– This move could squeeze funding into the startup sector facing a liquidity crunch and may prompt more startups to shift overseas.
What is Angel Tax?
Angel tax is a term used to refer to the income tax payable on capital raised by unlisted companies via an issue of shares where the share price is seen in excess of the fair market value of the shares sold. The excess realization is treated as income and taxed accordingly.
The tax was introduced in the 2012 Union Budget by the then finance minister e to arrest the laundering of funds.
It has come to be called angel tax since it largely impacts angel investments in startups.
Note: An angel investor is usually a high-net-worth individual who funds startups at the early stages, often with their own money.