🚀 𝘼𝙣𝙜𝙚𝙡 𝙏𝙖𝙭 𝙍𝙚𝙢𝙤𝙫𝙖𝙡: 𝘼 𝙂𝙖𝙢𝙚-𝘾𝙝𝙖𝙣𝙜𝙚𝙧 𝙛𝙤𝙧 𝙎𝙩𝙖𝙧𝙩𝙪𝙥𝙨?

 🚀 𝘼𝙣𝙜𝙚𝙡 𝙏𝙖𝙭 𝙍𝙚𝙢𝙤𝙫𝙖𝙡: 𝘼 𝙂𝙖𝙢𝙚-𝘾𝙝𝙖𝙣𝙜𝙚𝙧 𝙛𝙤𝙧 𝙎𝙩𝙖𝙧𝙩𝙪𝙥𝙨?

The recent announcement by Finance Minister Nirmala Sitharaman to abolish the so-called “Angel Tax” has sparked excitement across the startup ecosystem. But before the celebrations begin, it's crucial to delve into what this decision truly entails, the benefits it brings, and any potential pitfalls.

🔍 𝗨𝗻𝗱𝗲𝗿𝘀𝘁𝗮𝗻𝗱𝗶𝗻𝗴 𝗔𝗻𝗴𝗲𝗹 𝗧𝗮𝘅

The term "Angel Tax" isn't actually mentioned in the Income Tax Act. It refers to the tax under Section 56(2)(viib) on funds received by startups above their Fair Market Value (FMV). Essentially, if a startup raises funds at a valuation higher than its FMV, the difference is considered taxable income.

💼 𝗪𝗵𝘆 𝗪𝗮𝘀 𝗔𝗻𝗴𝗲𝗹 𝗧𝗮𝘅 𝗦𝗼 𝗕𝘂𝗿𝗱𝗲𝗻𝘀𝗼𝗺𝗲?

Imagine running a business valued at ₹10 crores. An investor, like Nikhil Kamath of Zerodha, agrees to buy 20% equity for ₹5 crores, valuing your company at ₹25 crores. The government would then tax the ₹3 crores difference between the FMV and the raised amount, leading to a hefty tax liability of ₹92.7 lakhs. This tax, not based on actual income but on perceived value, discouraged investment and hindered startup growth.

❓ 𝗧𝗵𝗲 𝗢𝗿𝗶𝗴𝗶𝗻𝗮𝗹 𝗜𝗻𝘁𝗲𝗻𝘁: 𝗪𝗵𝘆 𝗜𝗻𝘁𝗿𝗼𝗱𝘂𝗰𝗲 𝗔𝗻𝗴𝗲𝗹 𝗧𝗮𝘅?

The government's aim was to prevent black money laundering through shell companies. While well-intentioned, the Angel Tax was not the most effective solution and ended up stifling legitimate startup investments.

⏳ 𝗪𝗵𝘆 𝘁𝗵𝗲 𝗗𝗲𝗹𝗮𝘆 𝗶𝗻 𝗔𝗯𝗼𝗹𝗶𝘀𝗵𝗶𝗻𝗴 𝗜𝘁?

Although the government eased Angel Tax provisions in 2019, the exemptions were limited and conditional. Many startups still faced the tax, as they couldn't meet the stringent criteria. This is why the recent move to exempt "all classes of investors" is so significant.

📅 𝗪𝗵𝗮𝘁'𝘀 𝗡𝗲𝘅𝘁 𝗳𝗼𝗿 𝗦𝘁𝗮𝗿𝘁𝘂𝗽𝘀?

With the amendment in the Finance (No. 2) Bill, 2024, Section 56(2)(viib) will no longer apply from 1/04/2015 onwards. Startups receiving funding after 1/04/2024 can now focus on wealth creation without the burden of Angel Tax, fostering innovation and contributing to nation-building.

#incometax #angeltax #startup #budget