Removing the Angel Tax transforms India's startup ecosystem, creating a more robust and supportive investment environment.
- The changes to the angel tax system will take effect on April 1, 2025
What is Angel tax?
- Introduced in 2012 under the Finance Act,2012
- It falls under Section 56 (II) (viib) of the Income Tax Act,1961.
- It refers to the tax that the government imposes on funding raised by unlisted companies, or startups if their valuation exceeds the company's fair market value (FMV).
- FMV refers to the price set for selling or purchasing an asset in the open market.
- The excess amount was treated as income and taxed at a rate of 30.9 %.
- Purpose: To curb money laundering and prevent tax avoidance.
Reasons for scrapping
- To Reduce Compliance Burden for Startups.
- Methodology: The assessing officer used the discounted cash flow(DCF) method to determine fair market value, which is considered an unfavorable practice for startups.
- DCF evaluates investment by discounting the estimated future cash flows.
- It reduces FDI (foreign direct investment) into India.
- Abolishing the Angel Tax is also in line with the government's Startup India initiative.
Startup India initiative(2016)
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