Angel Tax : Impact, Recent Changes, and Future Prospects.

  Sep 27, 2023

Angel Tax and Its Modifications in India

Q: What is Angel Tax?

A: Angel tax is a tax levied on the investment made into startups at a premium over their fair market value.
The tax is typically paid by the startup.

Q: Why is it Imposed?

A: The tax is imposed to curb money laundering and to regulate the flow of investment into startups.
It aims to ensure that the capital being invested is genuine and not a means to convert black money into white.

Q: Who Does It Affect?

A: It primarily affects startups and their investors, especially those who invest at a valuation considered to be above the fair market value of the shares.

Q: Why Was It Resented?

A: Angel tax has been criticized for stifling innovation and making it difficult for startups to raise capital.
It was seen as a roadblock for foreign and domestic investors who were otherwise willing to invest in Indian startups.

Q: What Changes Have Been Made Recently?

A: The government has eased some provisions in the angel tax rules. It introduced five different valuation methods for shares and allowed a 10% tolerance for deviations from accepted share valuations.
These changes aim to bring relief to prospective foreign investors.

Q: Who Benefits from the New Rules?

A: Non-resident investors stand to benefit as they now have more flexibility in the valuation methods that can be used.
However, the changes do not apply to resident investors.

Q: What Do Experts Say?

A: Experts believe that the changes bring in more clarity and should encourage investment into Indian startups.
They think the modifications will provide more flexibility to merchant bankers for the valuation of a company.

Q: Are There Still Concerns?

A: Yes, the new rules do not apply to resident investors, which means they still face the stringent old rules.
Furthermore, although the rules are eased, they still exist, which some believe continues to hamper the startup ecosystem.

Q: What's the Overall Impact?

A: The easing of the rules is expected to stimulate foreign investment into Indian startups, thus potentially boosting the startup ecosystem.
However, it remains to be seen how much of a difference these changes will actually make.

Q: What Future Litigations Are Expected?

A: The amendments are designed to reduce the chances of future litigation by offering more clarity to both investors and startups on how valuations should be conducted.
This Q&A provides a basic overview of what the angel tax is, why it's imposed, why it was resented, and what changes have been made to soften its impact.


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