Easing the burden: Positive reforms and solutions to Angel Tax issue

The guidelines governing share valuation have played a pivotal role in reducing confusion and enhancing transparency. To safeguard interests and enforce due diligence, measures have been implemented to differentiate authentic investors from fraudulent enterprises.

- PRANAY MATHUR

The term “angel tax” has recently started gaining prominence within the startup sector, causing apprehension among entrepreneurs, investors, and legislators. The angel tax, which is a direct tax levied on funds received from angel investors by unlisted companies, has had an impact on the thriving startup ecosystem in India. Nevertheless, to foster innovation and entrepreneurial spirit, the Indian government has initiated a range of constructive initiatives and solutions aimed at alleviating the angel tax’s burden.

Understanding the Angel Tax Issue

The angel tax is an expensive tax on startup funding received beyond the true market value of their shares. It was introduced to prevent money laundering and illicit fund flows by taxing any investment made in an unlisted company if the investment amount exceeded the fair market value of the shares issued. However, its implementation led to unintended consequences and challenges for startups.