Why a proposed change in Angel Tax has rattled Indian start-ups

Why a proposed change in Angel Tax has rattled Indian start-ups

Context- A recently proposed detail has Indian start-ups worried. These new age firms, that offer their shares to foreign investors, may have to pay ‘angel tax’, which was earlier only supposed to be paid for investments raised by resident Indian investors, as per a motion made in the Finance Bill, 2023.

The move could adversely impact financing available to the start-ups, which have already been reeling under a funding winter since 2022, industry insiders are speculating.

(Source- Tracxn)

What exactly is the proposed change?

  • The Finance Bill, 2023, unveiled by Finance Minister Nirmala Sitharaman on Wednesday, has proposed to amend Section 56(2) VII B of the Income Tax Act.
  • The provision states that when an unlisted company, such as a start-up, receives equity investment from a resident for issue of shares that exceeds the face value of such shares, it will be counted as income for the start-up and be subject to income tax under the head ‘Income from other Sources’ for the relevant financial year.
  • However, with the latest amendment, the government has proposed to also include foreign investors in the ambit, meaning that when a start-up raises funding from a foreign investor, that too will now be counted as income and be taxable.

Why are start-ups concerned?

  • The change comes as the funding for India’s startups dropped by 33 per cent to $24 billion in 2022 as compared to the previous year, according to a PwC India report released in January.
  • Foreign investors are a key source of funding for the start-ups and have played a big role in increasing the valuation.
  • This could compel more startups to flip overseas, as foreign investors may not want to deal with additional tax liability by virtue of their investment in the startup.

Source- Indian Express

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