[Opinion] An In-depth Analysis of Expanded ‘Angel Tax’ Provisions

Ashutosh Mohan Rastogi, Dhruv Seth & Kartikey Vashist – [2023] 152 taxmann.com 637 (Article)

Finance Act 2023 struck the nerves of investors and start-ups by amplifying the scope of the vexed ‘Angel Tax’ – including non-resident investors within its purview.

The new provisions come across as the antithesis of ‘Invest in India’, at least in their current iteration. And while the subsequent CBDT Notifications attempted to assuage fears, the underlying issue persists. This article dives into these new provisions, their implications for start-ups, and tax planning for prospective ‘angels’.

Objective of Section 56(2)(viib)

Memorandum to Finance Act 2023 states that Section 56(2)(viib) of the Income Tax Act 1961 (‘the Act’) was inserted vide Finance Act, 2012 to prevent the generation and circulation of unaccounted money through share premium received from resident investors. The 2023 amendment, however, included the consideration received from a non-resident also under the ambit of section 56(2)(viib) by removing the phrase ‘being a resident’ from the said clause.

Ostensibly, the amendment reiterated the original objective for expanding the scope of Section 56(2)(viib), without providing a rationale for the same. The modus operandi exercised by tax authorities in enforcing this provision renders the original objective peripheral and irrelevant. Investors have been receiving notices from the department, examining their creditworthiness, despite the fact that the source of funds was never in doubt. The manner in which Section 56(2)(viib) is being applied is without any regard to its original intention i.e., preventing the circulation of black money.

Ironically, the term ‘angel tax’ now seems like a contradiction by and of itself, as we discuss angels on one hand, and tax them on the other. In order to analyze the ramifications of the new provisions, let us briefly look at the changes introduced in Finance Act 2023 and subsequent notifications vis-à-vis the erstwhile provisions.

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