Daily Current Affairs : 20-June-2024
In recent years, the Confederation of Indian Industry (CII) has raised concerns about the Angel Tax and has called for its removal to promote capital formation and enhance start-up investment in India. Let’s explore what Angel Tax is and how it affects businesses, particularly start-ups, in the country.
What is Angel Tax?
Angel Tax was introduced in India in 2012 under the Income-tax Act, 1961. It is a tax levied on unlisted companies when they raise capital through the issue of shares. The tax is applied if the share price exceeds its fair market value. The purpose behind this tax was to combat money laundering and ensure that companies follow proper tax norms when raising funds. Essentially, it aims to prevent businesses from inflating their share prices to avoid paying taxes, particularly in cases where large investments are involved.
Negative Impact on Start-up Ecosystem
While Angel Tax was introduced with the intention of curbing financial fraud, it has created significant challenges for start-ups in India. Here’s how:
- Increased Burden on Entrepreneurs: Start-ups raising capital often face difficulties in determining the fair market value of their shares, leading to potential tax liabilities. This uncertainty discourages investors from investing in early-stage companies.
- Hindering Investment: Many angel investors hesitate to invest in start-ups due to the fear of being taxed on their investment. This has resulted in a slower flow of capital to emerging businesses, limiting growth opportunities.
- Lack of Clarity: The rules surrounding Angel Tax have often been ambiguous, making it difficult for start-ups to comply with tax laws. This lack of clarity increases the risk of legal complications for business owners.
CII’s Call for Removal of Angel Tax
To foster a more vibrant start-up ecosystem, the Confederation of Indian Industry (CII) has recommended the removal of Angel Tax. The CII argues that eliminating this tax will help:
- Encourage Investment: By removing the tax, start-ups will be more likely to attract angel investors who are willing to take risks and fund innovative ideas.
- Promote Capital Formation: Without the burden of Angel Tax, businesses can use the funds they raise more effectively to grow and expand, ultimately contributing to the economy.
- Simplify Regulations: Removing the tax would simplify compliance for entrepreneurs, allowing them to focus more on innovation and less on legal complexities.
Important Points:
Angel Tax Overview:
- Introduced in 2012 under the Income-tax Act, 1961.
- Levied on unlisted companies raising capital through share issuance, if the share price exceeds fair market value.
- Aimed at preventing money laundering and ensuring tax compliance.
Negative Impact on Start-ups:
- Increased Burden on Entrepreneurs: Difficulty in determining fair market value leads to uncertainty and potential tax liabilities.
- Hindering Investment: Angel investors are hesitant to invest due to fear of being taxed on their investments.
- Lack of Clarity: Ambiguous rules make it hard for start-ups to comply with tax laws, increasing the risk of legal issues.
CII’s Recommendation for Removal:
- Encourage Investment: Removal of Angel Tax would attract more angel investors willing to take risks on start-ups.
- Promote Capital Formation: Without the tax burden, start-ups can use funds more efficiently for growth and expansion.
- Simplify Regulations: Eliminating the tax would reduce legal complexities and allow entrepreneurs to focus on innovation.
Why In News
The Confederation of Indian Industry (CII) has strongly recommended the removal of the ‘Angel Tax’ to stimulate capital formation and foster a more supportive environment for start-ups, citing its detrimental effect on attracting investment and hindering the growth of emerging businesses.
MCQs about Removing Angel Tax to Boost Start-up Growth in India
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What is the primary purpose behind the introduction of Angel Tax in India?
A. To encourage foreign investments
B. To combat money laundering and ensure tax compliance
C. To promote the growth of start-ups
D. To lower taxes on start-up investments
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Which of the following is NOT a negative impact of Angel Tax on start-ups?
A. It discourages angel investors from funding start-ups.
B. It increases the legal complexity for entrepreneurs.
C. It encourages more start-up investments by reducing tax burdens.
D. It creates uncertainty over share valuation.
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According to the Confederation of Indian Industry (CII), what would be the benefit of removing Angel Tax?
A. Increased foreign exchange reserves
B. More government control over start-ups
C. Increased capital flow and support for innovation
D. Higher taxes on large companies
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How does the ambiguity in Angel Tax rules affect start-ups?
A. It simplifies tax compliance
B. It makes it easier for start-ups to attract investors
C. It leads to legal complications and increased risk
D. It reduces the need for financial audits
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