Abolition of Angel Tax in the Budget:
1. Introduction:
Angel Tax, first introduced in the Union Budget 2012 by Finance Minister Pranab Mukherjee, was designed to curb money laundering through investments in startups and identify fraudulent firms. This tax, under Section 56(2)(viib) of the Income Tax Act, targeted investments exceeding the fair market value of shares issued by private companies.
However, significant changes are underway with its proposed abolition in the Finance Bill 2024.
2. PROVISIONS OF Section Section 56(2)(viib) – Where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person, 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 a specified fund; or (ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf.
Until Finance Act 2023, it was taxed only if investments were made by resident investors. Last year, the words “any person being resident” were replaced with the words “any person” including Foreign Investors in this clause.
3. Abolition of Angel Tax in the Budget:
In section 56 of the Income-tax Act, in sub-section (2), in clause (viib), after the second proviso, the following proviso shall be inserted with effect from the 1st day of April, 2025, namely:–– “Provided also that the provisions of this clause shall not apply on or after the 1st day of April, 2025.”.
4. Conclusion:
The abolition of the angel tax is expected to pave the way for increased funding from both domestic and international investors.
The existing legal mechanisms, such as the PMLA Act, can address concerns related to money laundering without imposing additional burdens on investors.
