What is Angel Tax?

Angel Tax refers to a tax levied on investments made by angel investors in startups or small and medium enterprises. The tax was originally introduced to prevent money laundering through the issue of shares at a premium valuation.

How does Angel Tax work?

The tax applies when the share price exceeds the fair market value of the shares issued. The excess amount is considered income of the startup and is taxed at the applicable rate. Angel Tax does not apply to debt funds, but it now covers non-residents as per the Finance Bill of 2023.

Jurisdiction of Angel Tax

Angel Tax is not applicable to debt funds. The tax is followed not only in India but also in many other countries. Previously, it only applied to domestic investors, but now it also covers non-resident investors.

Understanding Fair Market Value

Fair market valuation is the determination of a company's value. Tax authorities typically use the book value or discounted cash flow method to value a company. If a company's valuation exceeds the amount determined by a tax officer, it may raise suspicion.

Impact of Angel Tax on Startups and Investors

Angel Tax aims to prevent money laundering but has faced criticism. Heavy taxation and regulatory scrutiny discourage angel investors and startups. The tax hinders innovation and makes it challenging for startups to attract funding.