Angel tax that was introduced in 2012 as an anti-abuse measure to prevent money laundering, has wreaked havoc for many start-ups (and will now do the same to multinational companies).
A better approach may be to let commerce and business operate freely but seek more information in a company’s tax return on how premium has been calculated and whether it is market standard for such a company or business, considering international and Indian valuation standards. Conceptually, angel tax seems somewhat flawed because it does not account for business exigencies and new financing techniques, especially in the venture capital and private equity space.
Contrary to the expectation that the Indian government would grant relief to resident investors by repealing the angel tax provisions, the Finance Act, 2023, the government made these provisions applicable to non-resident investors. With a lot of grievances being voiced, the government has now created exemption buckets, which will help some foreign investors but not others. The question remains whether creating tax and regulatory complexities is the right way forward.