What is Angel Tax – A Guide to Angel Tax

What is Angel Tax?

Angel tax is the tax paid by unlisted companies on gaining funding from angel investors through issuing shares. The companies doing very well operationally use their brand value to get funding and issue shares at a price more than its fair market value. The company's excess earnings are considered income from other sources

What is the Applicability of Angel Tax?

Now you must think that the entire funding the company receives is taxable. However, this is not true. Tax is levied only on the premium amount received by the company. In simple words, the difference between the face value of the shares issued and the actual value of the shares is calculated and taxed at the applicable rate.

Let’s take a general example -

Suppose A Ltd. and B Ltd. manufacture pens and sell them at ₹20 and ₹8, respectively. The cost of manufacturing a pen is ₹10. Now, A Ltd. is a renowned brand, and people are willing to purchase its product even after paying ₹20.

The extra ₹10 that people are willing to pay for the pen of A Ltd. is the premium amount or the extra amount earned by the company.

Now let us understand this with a financial example -

Every company’s shares have a fair value and a market value. Suppose Chiggy Ltd., a food delivery company, receives angel funding of 1 crore. Out of this, 70 lakhs is the face value of the shares, and 30 lakhs are the premium amount that the investors are willing to pay for the shares of Chiggy Ltd. Now, angel tax is applied and calculated on this 30 lakhs, i.e., the premium amount instead of the total amount of funding received.

What are the Changes in Angel Tax for Budget 2023?

Budget 2023 proposes that shares being issued to non-resident investors over and above FMV will be covered by the aforesaid provision of taxability. Moreover, benefit of exemption from the ‘Angel Tax’ provided to domestic investors of eligible start-ups has not been extended to non-resident investors as yet.

What are Angel Tax Exemptions?

Earlier, the consideration received in the form of angel investment was chargeable to tax under section 56(2)(viib) under the ‘Income From Other Sources’ head. However, the Indian government brought about exemptions in Angel Tax for startups in 2019 to encourage ease of doing business. Startups are now exempt from paying angel tax subject to the following conditions -

• The Department for Pr omotion of Industry and Internal Trade (DPIIT) should recognize the startup.
• The total paid-up capital of the startup should be less than or equal to 25 crores. However, the calculation of the paid-up capital shall not include the consideration received in respect of shares issued to a non-resident, a venture capital fund and a venture capital company.
• A certified merchant valuer must value the startup and find its fair market value.
• The startup must receive angel investment from foreign investors and not resident investors.
• The startup should not invest in any of the following within 7 years of issuing the shares -
  • Building or land
  • Advancing loans
  • Capital contribution to any other entity
  • Any mode of transport costing more than 10 lakhs
  • Jewellery
  • Archaeological collections and Shares and securities.

What are the Rates of Angel Tax in India?

The angel tax is levied at the rate of 30% in India, and an additional cess of 3% is also applicable to it as per section 56(2)(vii)(b) of the Income Tax Act, 1961. The effective rate of the angel tax is 30.9%.

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