The concept of ‘Angel Tax’, first introduced by the Finance Act of 2012, has now been around for more than a decade. The intention behind the enactment of section 56(2)(viib) of the Income Tax Act, 1961 (‘Act’) was to deter the creation of shell firms and to prevent the circulation of black money through the subscription of shares of closely held companies at unreasonably high valuations.
Prior to 1st April, 2023, the angel tax provisions were applicable only to funds raised by a closely held company from a person resident in India. The erstwhile provisions stated that, where a company, not being a company in which the public is substantially interested, receives, in any previous year, from any person being a resident, any consideration for the 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 shall be deemed to be the income of the concerned company and will be chargeable to tax under the head Income from other Sources for the relevant financial year.
Under the proviso to the section, the following investments are excluded from the ambit of angel tax provisions:
a. Investment received by a venture capital undertaking from venture capital companies or venture capital funds (‘VCFs’) or a specified fund [Category I and Category II Alternative Investment Funds (‘AIFs’)].
b. Investment received by a company from certain classes of persons as notified under the notification1 (The Ministry of Commerce and Industry notified companies2 that would qualify the definition of ‘start-up’ as being exempt).