In recent news, investors from 21 countries, including the US, the UK, France, Australia, and Japan, have been granted exemption from the levy of angel tax for investing in unlisted Indian startups. This move aims to attract more foreign direct investment (FDI) into India and promote a favorable investment environment.
Angel tax, which was introduced in 2012, is a tax imposed on unlisted companies, particularly startups, based on the capital they raise through the issuance of shares. The latest amendment by the Central Board of Direct Taxes (CBDT) includes foreign investors within the ambit of angel tax, making their investments subject to taxation.
Understanding Angel Tax:
Angel tax is a tax imposed on unlisted companies when they issue shares at a price higher than the fair market value of the firm’s shares. It was initially introduced to deter the generation and use of unaccounted money through share subscriptions of closely held companies. When a company issues shares at a higher value than the market value, the excess amount is considered as income for the startup and falls under the category of ‘Income from other Sources’ for the relevant financial year.
Amendment and Inclusion of Foreign Investors:
The recent amendment by the CBDT proposed the inclusion of foreign investors within the purview of angel tax. This means that when a startup raises funding from a foreign investor, the investment will be considered as income and subjected to taxation. The CBDT is a statutory authority operating under the Central Board of Revenue Act, 1963, and is responsible for matters related to the levy and collection of direct taxes.
Exempted Entities and Countries:
However, the amendment also exempts certain entities from angel tax. These include government and government-related investors such as central banks, sovereign wealth funds, and international or multilateral organizations. Additionally, entities controlled by the government or where the government’s direct or indirect ownership exceeds 75% are also exempted. Banks and entities involved in the insurance business, subject to applicable regulations in their respective countries, are also exempted.
Notably, countries like Singapore, Netherlands, and Mauritius, which contribute a significant portion of foreign direct investment in India, have not been included in the exemption list. The government’s intention behind explicitly mentioning the exempted countries is to attract more FDI from nations that have robust regulatory frameworks.
Significance of the Amendment:
The exemption of angel tax for investments from regulated entities resident in countries with stringent and effective regulatory frameworks serves a logical purpose. It aligns with the government’s initial objective of bringing FDI under the purview of angel tax to prevent the circulation of unaccounted money. By encouraging investments from countries with strong regulatory systems, India aims to create a favorable investment climate and ensure transparency in financial transactions.
Important Points:
- Angel tax: 📊
- Introduced in 2012 to prevent unaccounted money circulation through share subscriptions.
- Tax imposed on unlisted companies for raising capital through shares.
- Raises income for startups and falls under ‘Income from other Sources’ for taxation purposes.
- Amendment and Inclusion of Foreign Investors: 🌍
- Central Board of Direct Taxes (CBDT) amended angel tax regulations.
- Foreign investors now subject to taxation when investing in startups.
- CBDT is a statutory authority overseeing direct tax matters.
- Exempted Entities: 🏦🌐
- Government and government-related investors exempted.
- Banks and entities in the insurance business subject to applicable regulations exempted.
- Entities with government control or ownership of 75% or more exempted.
- Excluded Countries: 🚫
- Singapore, Netherlands, Mauritius not included in the exemption list.
- Exemption aims to attract foreign direct investment from countries with robust regulatory frameworks.
- Significance: 💡
- Government aims to attract more FDI into India.
- Aligns with the original objective of preventing unaccounted money circulation.
- Exempting investments from regulated entities in countries with strong regulations promotes transparency.
- Boosting Economy and Startup Ecosystem: 💰💼
- Exemption encourages a favorable investment climate.
- Promotes transparent financial practices.
- Expected to stimulate entrepreneurship and enhance India’s startup ecosystem.
Why In News
Investors from 21 countries, such as the US, the UK, France, Australia, and Japan, have been granted a significant advantage by being exempted from the burdensome angel tax when investing in unlisted Indian startups. This move not only encourages foreign investment but also fosters a global network of support and collaboration for the growth of India’s startup ecosystem.
MCQs about Angel Tax
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What is the purpose of angel tax?
A. To encourage foreign investment in startups
B. To impose taxation on unlisted companies
C. To prevent the circulation of unaccounted money
D. To promote transparency in financial transactions
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Which entity/ies are exempted from angel tax?
A. Foreign investors from Singapore, Netherlands, and Mauritius
B. Startups raising capital through shares
C. Government-related investors and banks
D. Companies listed on the stock market
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What is the role of the CBDT in relation to angel tax?
A. Introducing the concept of angel tax
B. Imposing taxation on foreign investors
C. Amending angel tax regulations
D. Controlling the stock market
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What is the expected impact of the angel tax exemption on India’s economy?
A. Boosting entrepreneurship and startup ecosystem
B. Decreasing foreign direct investment
C. Creating an unfavorable investment climate
D. Encouraging unaccounted money circulation
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