NEW DELHI: Despite persistent industry demands to address the issue of angel tax, sources suggest that the government is unlikely to abolish it in the upcoming budget to be announced on July 23. The rationale behind retaining the angel tax is to prevent the potential risk of converting black money into white money in the absence of this provision.
“Removing Angel tax can lead to black money because some people might exploit the system by investing their undisclosed, untaxed money into startups at higher-than-actual values. This practice allows them to convert their unaccounted for or illegally obtained money into legitimate, taxable income through these investments,” one of the sources, who didn’t want to be cited told this paper.
Angel tax is a provision that affects start-ups and unlisted companies that receive funding from foreign investors, who are a major source of capital for these ventures. Despite various supportive schemes like the Startup India Seed Fund Scheme, the Startup India initiative, and Startup Accelerators of MeitY Product Innovation and Growth, the presence of angel tax is proving to be counterproductive, as per experts. Industry is demanding from the government to address the issue of angel tax which was first introduced in 2012 to prevent money laundering.
“The issue with angel tax lies in the subjective valuation of start-ups, which can lead to disputes with tax officials. Startups are required to justify any excess amount raised beyond the valuation determined by a specific formula or approach. This scrutiny not only creates uncertainty but also poses a risk of additional tax burdens on the startups.
Moreover, the extended reach of angel tax is prompting startups to consider relocating or establishing operations in foreign jurisdictions with more favorable tax environments,” the source said.