The phrase “Angel Tax” is constantly used in the beginning scene in India. Do you ever think? what is Angle Tax?
It’s a tax assessed on money businesses raise when they vend shares to angel investors.
Even though the tax was enforced to help prevent money laundering, it has had a major effect on companies. High taxes on angel investor investments limit their capacity to raise capital.
Background and Origin of Angel Tax
The Indian Income Tax Act’s Section 56( 2)(viib) allowed for the preface of the Angel Tax in 2012. When an incipiency gets capital from an angel investor.
If its valuation is judged to be more advanced than its fair request value, a tax is levied. In this instance, surplus capital is taxable at a rate of 30.9% as it is regarded as income.
The main goal of this tax was to prevent money laundering. It targeted shell corporations that issued shares at inflated prices, turning illegal funds into legal ones. Still, this well-meaning approach has created some difficulties for licit entrepreneurs.
Who’s Impacted by Angel Tax?
Angel investors give early-stage capital to Indian entrepreneurs, who the Angel Tax most impacts. Angel investors are generally fat people who advance money to start-ups in their early phases, generally in stock return.
Angel investors generally take on further troubles and make lower investments than institutional investors like chance capitalists.
Angel investors and entrepreneurs may find the tax to be a significant difficulty. Tax authorities frequently dispute launch valuations due to their private nature.
This can lead to clashes and fines, especially in the early phases, when there is a wide range of potential growth.
Challenges and Criticism of Angel Tax
The doubts and challenges that Angel Tax adds to the beginning financing process have drawn much criticism. Among the primary difficulties are
- Private Valuations – Startups are estimated based on their projected profitability and growth potential. This is particularly true in the technology and innovation industries, where current income is less of a focus. Because of this, tax authorities find it challenging to determine a” fair request value,” which might affect disagreements.
- Investor Hesitancy – Because of the possible tax obligation, angel investors are reticent to fund enterprises. As a result, companies that substantially depend on angel financing for survival and expansion have seen a retardation in early-stage funding.
- Executive Burden – Startups constantly have to devote a large amount of time and money to action and supplying evidence that the investments were valid, which takes down from their primary goal of expanding the company.
- Innovation Impact – The Angel Tax has a circular impact on creation and entrepreneurship in India by inhibiting investment in startups. Increased difficulty in securing financing may impede profitable growth when smaller businesses are unable to launch their creative ideas.
Exemptions and Reforms in Angel Tax
In response to the backlash from the startup community, the Government of India has taken a way to ease the burden of Angel Tax on genuine startups. In 2019, the government blazoned several reforms aimed at reducing the impact of the Angel Tax, including.
- Exemptions for DPIIT-Recognized Startups: Startups registered with the Department for Promotion of Industry and Internal Trade( DPIIT) are free from angel tax, provided they meet certain conditions regarding the magnitude of the investment and the type of investor.
- Relaxation in Documentation Requirements: Startups are no longer needed to back up their valuations with riotous quantities of evidence. As a result, startups no longer have to worry about executive tasks and can concentrate on running their businesses.
- Increased Transparency: The Central Board of Direct Taxes( CBDT) has released rules to guarantee that valuation debates are settled openly and invariantly.
How to Avoid Angel Tax Issues?
Startups can use several tactics to steer clear of Angel Tax problems:
- Register with DPIIT: If startups match the requirements, they should make sure they are registered with DPIIT, which offers protection from Angel Tax.
- Keep Transparent Records: To prove that the money was collected at fair market value, startups should maintain thorough records of their fundraising efforts, including the methodology used to determine their valuation.
- Collaborate with Valuation Specialists: Startups may support their value and steer clear of tax authorities’ conflicts by hiring a professional valuation specialist.
- Focus on Compliant Investors: Since investments from some investor categories (such as venture capitalists and international funds) may be free from angel tax, startups should look for funding from reputable and compliant investors.
Current Scenario and Future Outlook
After realising its existence, the Indian government has taken action to lessen the detrimental effects of the angel tax on the startup environment.
The situation has improved since DPIIT-recognized startups are now excluded, and paperwork requirements have been loosened. Certain difficulties remain, though, especially for new businesses that are not eligible for exemptions or that are just beginning to raise money.
The government is expected to make more changes and clarifications to the Angel Tax structure as time passes. While they continue to look for financing, businesses must take proactive measures to guarantee compliance with tax regulations.
Conclusion
The Angel Tax has significantly impacted Indian entrepreneurs, particularly during their initial fundraising phases. While the tax’s goal of preventing money laundering was admirable, it has put real companies and angel investors at a disadvantage.
The situation is improving because of continuous improvements and expanding exemptions, yet there are still issues. To prevent disagreements, startups must be on the lookout, keep open records, and collaborate closely with valuation specialists.
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