Short Article

25-10-2023 | 15:50 PM

Angel Tax For Startups

The Income Tax Department has notified new angel tax rules that comprise a mechanism to evaluate the shares issued by unlisted startups to investors.

Key Highlights: 

• The Indian government introduced angel tax in 2012 to snuff out any chance of money laundering through start-ups.
• Unlisted start-ups can raise money from resident investors by selling their closed shares. Angel tax is levied on start-ups when they receive investments in excess of their ‘fair market value’.
• The perceived profit is considered as income from other sources—it’s taxed at 30.6% and termed as angel tax.
• Earlier, it was imposed only on investments made by a resident investor. However the Finance Act 2023 proposed to extend angel tax even to non-resident investors from April 1, 2024.
• Government invited suggestions and feedback from stakeholders and the general public on the Draft Rule 11UA for valuation of methods for calculating the Fair Market price.

The Key Highlights of the Changes in Rule 11 UA are:

• The final rules seek to provide clarity to investors and give a set of valuation methods to choose from so that the worth of unlisted shares can be assessed accurately.
• The rules have broadened the scope and valuation methodology by offering foreign investors five additional methods and also brought in compulsorily convertible preference share preference shares (CCPS), often seen as a key element of startup financing.
• The notification of the angel tax rules is expected to ease some of the worries of foreign investors.
• They provide for expansion of the valuation methodologies to include globally accepted methodology and provide a broad parity to resident and non-resident investors.