Atul Puri, Managing Partner and Co-Founder at SW India, explained that the term “Angel tax” is not specifically defined in the Income Tax Act, 1961. However, it has come about from Section 56(2)(viib) of the Act, which states that if an unlisted company issues shares above their fair value, the excess amount will be taxed. This provision applies to both resident and non-resident shareholders, with penalties under Section 270A of the Act.
The Department for Promotion of Industry and Internal Trade (DPIIT) has suggested removing the angel tax, a move welcomed by industry experts who believe it will support capital formation. Startups, especially those not registered with DPIIT, heavily rely on foreign investments in their early stages, and the angel tax could impede this flow of funds. Therefore, many startups are hopeful that the angel tax will be eliminated in the upcoming budget for 2024.
Puri also mentioned Section 115BAB, which allows new domestic manufacturing companies established from October 1, 2019, to pay a reduced corporate tax rate of 15%. Companies that began manufacturing before March 31, 2024, could also benefit from this section. He recommended extending the sunset clause for Section 115BAB beyond March 31, 2024, to allow more companies to take advantage of the lower tax rate. Additionally, he proposed expanding the scope of this section to include existing companies in sectors like logistics, renewables, EV, and infrastructure, with an extension of the sunset clause for five more years.