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Finance Bill, 2023--Start Up

The Devil in Angel Tax

Srivatsan Ranganathan

The author has covered the proposed amendment in Section 56(2)(viib) of the Finance Bill, 2023 in this article.

1. Scope of the Section

section 56(2)(viib) taxes excess consideration received for issue of shares/securities by a closely held company over and above its fair value as income from other sources. This section has been in the statute since 2012. It currently excluded non-residents in its ambit.

2. Proposed Amendment

Finance Bill, 2023 has removed the word 'being a resident' in this section thereby making this section applicable for both residents and non-residents (corporate/non-corporates). Henceforth receipt of share premium beyond its fair value will be deemed income from other sources in the hands of the recipient closely held corporate.

For this section to be applicable there has to be -

(i) Consideration received

(ii) For issue of shares

(iii) Such consideration received in excess of the fair value will be treated as income from other sources and taxed in the hands of the Company.

3. Rationale behind the Section

It is an anti-evasion provision to prevent money laundering also called Angel tax provision as it envisages Angel investor infusions to be taxed in the hands of the investee Company. It co-exists with Section 68 cash credits to recap. Start ups and venture capital funds have a breather under both these two Sections 56(2)(viib) and 68. The breather for start up is also via a set process.

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