Angel tax is a term used to refer to the income tax payable on capital raised by unlisted companies via issue of shares where the share price is seen in excess of the fair market value of the shares sold. The excess realisation is treated as income and taxed accordingly. The tax was introduced in the 2012 Union Budget by then finance minister Pranab Mukherjee to arrest laundering of funds. It has come to be called angel tax since it largely impacts angel investments in startups.
Many startups are demanding for the scrapping of angel tax as arriving at fair market value is a complex issue. Start ups complaints about the harassment from the Income Tax official. The Income tax act, 1961 under section 56 provides plenary power to assess these companies.
Since scrapping angel tax is problematic as it will lead to money laundering and creation of shell companies. The balance between safeguarding the real startups and prevention of money laundering needs to be taken into consideration. There is proposed reform for raising the limit of exemption from 10 cr to 25 cr. concessions are under consideration with the size of the start-up, the duration of its operation, and the income of the angel investor.