History of Angel Tax:

 

Angel Tax was introduced in 2012, by Finance Minister Pranab Mukherjee. Under the Income Tax Act, Angel tax is defined in Section 56(2)(viib). The section stated that Angel tax must be paid on the funds raised by unlisted companies through the issuance of shares in off-market transactions if they exceed the fair market value of the company. The angel tax was introduced to oversee money laundering via unlisted companies.

 

The policy faced various criticisms for making investments more difficult and costly for startups. Over time, the Indian government made reforms to ease its impact, and now in 2024, the government has abolished the angel tax to support and stimulate the startup ecosystem.

 

Benefits of the angel tax to the government:

 

The angel tax helps the government by taxing extra money that startups raise when selling shares for more than their real value. This extra tax money can be used for public projects and services, boosting government funds. Also, it helps prevent money laundering and the use of illegal money in investments. It encourages startups to be transparent and value their shares properly, creating a fair investment environment. This regulation protects investors from companies that might be overpriced or dishonest. Overall, the angel tax supports financial honesty and also helps the government by increasing its revenue. 

Benefits of the angel tax to the investors:

 

Investors may get deductions on the money they put into startups, which lowers their taxable income. In some areas, tax credits are available that lower the amount of tax investors have to pay, making these investments more appealing. There are also exemptions from capital gains tax for startup investments held for a certain time, encouraging investors to stay invested for a longer time. Additionally, if a startup fails, investors can use their losses to reduce their tax on other income, which helps reduce the risk of investing in ventures. 

Conclusion:

By removing the angel tax, the government is encouraging investors to fund the new companies without any additional tax burdens. Also, the abolition of the angel tax reduces the paperwork and financial stress for startups, making easier access to early-stage capital. This removal of the angel tax is expected to result in a rise in new startups and business incentives. 

 

Disclaimer: This blog is posted solely for educational purposes. The securities mentioned are examples and not recommendations. It is based on various secondary sources from the internet and is subject to change. Please consult an expert before making any related decisions.