Why in news? The central government has eased some of the provisions of the angel tax introduced in this year’s Budget.

Highlights:

• The provision is on investments into start-ups by non-resident investors at a premium over their fair market value
• It has introduced five different valuation methods for shares and offered a 10% tolerance for deviations from the accepted share valuations.

What are the reforms?

• The Central Board of Direct Taxes (CBDT) has provided that the valuation of compulsorily convertible preference shares can also be based on the fair market value of unquoted equity shares.
• 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, 2024.

What is an Angel Tax?

• Angel tax came into being after a financial amendment was introduced in 2012 in the form Income Tax Act to plug money laundering practices
• Angel tax is essentially the tax that unlisted companies(start-ups) are liable to pay on the capital they raise through issue of shares at a price higher than its fair market value.
• The start-up is obliged to pay a part of their investment as tax to the government under Income Tax Act of 1961 at the rate of 30.6%