Angel Tax is Income tax Provision that charges Income tax on Portion of Consideration received by specified company from Angel Investors under the Provisions of Indian Income Tax Act, 1961 under Section 56(2)(viib) of the Act.
The Finance Act, 2012 had introduced sub-section (viib) in section 56(2) of the Income-tax Act, 1961 (Act) w.e.f. 1-4-2013 which provides for treating ‘income from other sources’, the premium received by a Company in which public is not substantially interested, over and above the fair market value of the shares on their transfer. The provision referred to earlier reads thus:
“…….the following incomes shall be chargeable to income-tax under the head “income from other sources”, namely,
(viib) Where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares:
Provided that this clause shall not apply where the consideration for issue of shares is received—
|(i)||by a venture capital undertaking from a venture capital company or a venture capital fund; or|
|(ii)||by a company from a class or classes of persons as may be notified by the Central Government in this behalf,|
Explanation,-For the purposes of this clause, –
|(a)||the fair market value of the shares shall be the value-|
|(i)||as may be determined in accordance with such method as may be prescribed; or|
|(ii)||as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, |
whichever is higher;
|(b)||“venture capital company”, “venture capital fund” and “venture capital undertaking” shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of Explanation to clause (23FB) of section 10;”|
The clause provides that where a closely held company issues shares to a resident, for amount received in excess of the fair market value of the shares, it will be deemed to be the income of the company under the head “income from other sources”.The object of the provision is to ensure that the excessive amount representing payments of a revenue nature are not disguised as share premium and does not escape taxation.. Another object of the provision is to check money laundering activities. .
But incidentally it has led to several disputes on taxing of consideration paid by Angel Investors to Startups which are more than current “FMV” of Shares based on Investor’s Analysis of Growth Prospects and that WHY TERMS “ANGEL TAX” Was used in COMMON PARLANCE.
CA Ankit Gulgulia (Jain) is Fellow Member of ICAI, Certified IFRS & Business Valuation from ACCA UK and is Practising Chartered Accountant with 8 Years plus of Rich Experience in Audit, GST, Income Tax, DGFT, Valuation, Strategic Advisory, Matters of FEMA, FDI, NCLT, RERA, ROC, SEBI, RBI, M&A, Fundraising, Startups etc as Founder of AGA, Chartered Accountants. AGA Works in wholesome business solutions right from scratch of Company Incorporation to Compliances all under One Roof. He also takes interest in being Virtual Chief Financial Officer (CFO) for Small and Medium Enterprises for Guiding them with All Business, Tax & Strategic Business Decision Making . To Know More, Learn here or contact us at email@example.com