Central Government to form committee on Angel Tax

  • The Central Government will form a committee to resolve issues  concerning the levy of angel tax on startups.
  • Over 50 entrepreneurs, startups and investors have  voiced their concerns on angel tax. They have complained that income tax officials have asked many start-ups to cough up money when they try to attract capital into their entities by issuing new shares.

What is Angel Tax?

  • According to the Economic Times, ‘it is a term used to refer to the income tax payable on capital raised by unlisted companies via issue of shares where the share price is seen in excess of the fair market value of the shares sold. The excess realisation is treated as income and taxed accordingly.’
  • The tax was introduced in the 2012 Union Budget by then finance minister Pranab Mukherjee to arrest laundering of funds.
  • Since it largely impacts angel investments in startups, it is called angel tax.
  • In trying to curb money-laundering, Section 56(2)(viib) of the Indian Income Tax Act, 1961 gives income tax officials a free hand to harass even genuine start-ups looking to raise investments for their growth. Under the Act, the IT department is free to arbitrarily decide the fair value of a company’s share and tax start-ups if the price at which their new shares are sold to investors is higher than the fair value of these shares.

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