Is angel tax on its way out?

The so-called angel tax, which is levied at a steep 30.6% on investments received by an unlisted company in excess of its fair market value, may be on its way out in relief for startups and their investors.

Ahead of the budget scheduled for later this month, the commerce ministry has forwarded a demand from startups seeking scrapping of the tax to the finance ministry, Indian media reported citing Department for Promotion of Industry and Internal Trade (DPIIT) secretary Rajesh Kumar Singh.

“The decision is to be taken by the ministry of finance. We have provided our inputs. It was not raised during the pre-budget consultations,” Mint quoted Singh as saying.

Under section 56 (2) VII B of the Income Tax Act, if a closely held company or a startup issues shares at a price exceeding fair market value, the difference will be taxed as income from other sources.

Introduced in 2012 to combat money laundering, this section complicates angel investment for startups due to unclear valuation methods.

The Finance Act 2023 proposed to extend angel tax provisions to non-resident investors from April 2024, adding to startup woes.

There are 141,323 DPIIT-recognised startups in India.