RAS question
Angel tax was related to:
Correct answer: (A) Tax on startup funding received above fair market value.
Angel tax applied to share premium that a startup or an unlisted Indian company received above fair market value; under Section 56(2)(viib), the excess was treated as income from other sources.
Explanation
Under Section 56(2)(viib) of the Income-tax Act, share premium received by an unlisted Indian company above fair market value was treated as income from other sources and taxed in the company's hands. This provision was associated with startup funding because the company could be taxed on the amount raised above fair market value instead of the entire amount being treated simply as capital. A Press Information Bureau note on Budget 2024-25 states that the Finance Minister proposed abolishing angel tax for all classes of investors to support startups, entrepreneurship and innovation in India. Therefore, angel tax concerned funding received above fair market value; it was not a tax on an angel investor's profit.
Why the other options are wrong
- (B) Angel tax was not imposed on the profits of angel investors. It applied to the excess share premium received by the company, which Section 56(2)(viib) treated as income from other sources.
- (C) It was not a general tax on foreign investment. Section 56(2)(viib) applied when share premium exceeded fair market value, not merely because the investment was foreign.
- (D) Donations to temples were unrelated to Section 56(2)(viib), startup funding, share premium or fair market value.
Concept
This question tests your understanding of taxation in startup finance, especially how income-tax provisions can affect capital raising. It is relevant to RAS because short questions are often asked about Budget announcements and startup-policy measures.