What is angel tax for start-ups?

• Angel tax is levied when an unlisted company issues shares to an investor at a price higher than its fair market value. 
• It is levied at the rate of 30.6 per cent.
• The provision was first introduced in 2012 to deter the generation and use of unaccounted money through the subscription of shares of a closely held company at a value that is higher than the fair market value of the firm’s shares.

New Changes

• Earlier, Angel tax was imposed only on investments made by a resident investor. 
• However the Finance Act 2023 proposed to extend angel tax even to non-resident investors from April 1. It means that when a start-up raises funding from a foreign investor, that too will now be counted as income and be taxable. 
• The Act made a specific provision to exempt startups recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) from the expanded scope of Angel Tax. 

Why in News?

• The government has eased some of the provisions of the angel tax introduced in this year’s Budget on investments into startups by non-resident investors.
• It has offered a 10% tolerance for deviations from the accepted share valuations.