What Is Angel Tax?

Angel tax is once again making news and here we will discuss about it in detail. On the raised funds which start ups do by issuance of shares at a price deemed to be higher than the fair market price, then on the excess amount which is realized it's treatment is as income and tax is levied on it accordingly. The tax was introduced in the year 2002 so as to prevent money laundering and other illicit practices in the system .

And as now many start-ups are being sent notices in lieu of angel tax, government in view of the interest of these companies has intervened saying that a committee will be set-up to oversee issues on angel tax and also at the same time said that no coercive action will be taken for recovery of the demand.

Exemption clause for angel tax

In April this year, government came with a notification that exemption on angel tax can be sought or is available in case the total investment including that from angel investors do not exceed over Rs. 10 crores. Also, for the same, an inter-ministerial board's approval as well as valuation certificate from the merchant banker is to be provided.

Also there remains another pre-condition for the exemption that angel investors had a minimum net worth of Rs. 2 crore or an average returned income of more than Rs. 25 lakh in the previous 3 years.

Valuation of start-up is a concern area as it is basis which the tax is levied and as it determines whether or not issuance of shares is at a price i.e. in sync with its fair value. Usually the valuation is done basis the commercial dealing between the investors and the company and takes into account earnings of a concern (projected) at a particular point in time. And this could go either way i.e. either the start-up can exceed the estimates or lag them due to highly uncertain environment.

The net asset value method is relatively being used to arrive at the valuation for a start-up but industry body is demanding employment of discounted cash flow or DCF method that though might not give true valuation of a concern.

Latest issue

There have been reported incidences where as many as 80 start-ups have been served with notices to pay angel tax. And it has come to fore that the payment being asked for is as high as 30% of the funding. And in this regards, angel investors have also been asked to submit their bank account statements, financial data as well as report details on their income source.

And getting valuation done through a merchant banker is also an expensive bet as against approaching a CA. Also, for the filing of an appeal CAs are being reached out to thus increasing their services fee for the start-up firm. Thus to bring about ease in the matter such that the start up industry does not faces harsh disruption the committee has been set up to oversee the entire issue.

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