The proposed removal of the Angel tax, specifically the revision of Section 56 of the IT Act, represents a major advancement for domestic companies and investors. Initially introduced to prevent value manipulation among resident taxpayers, the tax was later extended to non-residents, raising significant concerns within the industry.
Angel tax, as outlined in Section 56(2)(viib) of the IT Act, has been particularly problematic for startups with volatile valuations. It has led to conflicts over valuation methods, the handling of estimated figures, funding source scrutiny, and taxation on equity conversions. Originally aimed at combating black money, it frequently resulted in the taxation of shares issued above their fair market value, causing extensive legal disputes and difficulties for non-resident investors dealing with inconsistent valuation regulations (between Exchange Control regulations and the IT Act).
The proposed elimination of the Angel tax for all shareholder classes is a positive development for enhancing tax clarity and reducing legal disputes. This change is set to benefit the start-up ecosystem by easing investor burdens, simplifying deal negotiations, and streamlining documentation. It also underscores the government’s dedication to fostering growth and innovation, boosting resilience, and improving productivity in a shifting economic environment.
The amendment is slated to take effect on April 1, 2025, and is anticipated to offer substantial relief to start-ups and investors, contributing to a more dynamic and thriving business environment.
