Angel Tax in India: A Looming Obstacle for Startups

Demystifying the Web of Tax Regulations

What is Angel Tax?

Angel tax, also known as Section 56(2)(viib) of the Income Tax Act, casts a long shadow over the burgeoning startup ecosystem in India. It levies a tax on unlisted companies when they receive funding from angel investors, often through the issuance of shares.

The Genesis of Angel Tax

Angel tax was initially introduced as a measure to curb money laundering and tax evasion. However, its broad application has inadvertently ensnared legitimate startups, stifling their growth and innovation.

The CII's Plea

Recognizing the detrimental impact of angel tax, the Confederation of Indian Industry (CII) has strongly urged the government to scrap Section 56(2)(viib). The CII argues that the tax discourages foreign investment and hinders the development of a robust startup environment.

Unfair Valuation and Arbitrary Assessments

Angel tax becomes particularly onerous when companies are subjected to arbitrary valuations of their shares. This often leads to excessive tax burdens, straining the financial resources of young and promising startups.

A Call for Reform

The startup community has consistently advocated for reforming or abolishing angel tax. It has highlighted the need for clarity in valuation guidelines and a more transparent process for tax assessment. Without substantial changes, angel tax will continue to impede the growth of India's startup ecosystem, potentially stifling innovation and economic progress.