In Union Budget 2019, the government eased ______ to encourage start-ups in the country.
Angel Tax
Union Budget 2019 and Start-up Tax Relief
The Union Budget 2019 introduced several measures aimed at boosting the start-up ecosystem in India. One significant step was the easing of a particular tax that had been a cause of concern for many nascent businesses.
Understanding Angel Tax
Angel Tax, officially known as Section 56(2)(viib) of the Income Tax Act, 1961, is a tax levied on the capital raised by unlisted companies through the issue of shares, where the share price is seen as exceeding the Fair Market Value (FMV) of the shares. This excess amount is treated as 'income from other sources' and taxed.
The name 'Angel Tax' comes from the fact that this tax often applied to investments made by angel investors in start-ups. While intended to curb money laundering through share subscriptions at inflated values, its application to genuine start-up investments caused difficulties.
Challenges for Start-ups Before 2019
Before the changes in 2019, start-ups found it challenging to justify the high valuations at which they often raised funds, especially in early rounds. Tax authorities could question the valuation, leading to demands for Angel Tax, which put a significant financial burden on these young companies that were still in their growth phase and often not yet profitable. This uncertainty discouraged investments into start-ups.
Union Budget 2019 Changes to Angel Tax
Recognizing the issues faced by start-ups, the Union Budget 2019 eased the Angel Tax norms. Key changes included:
- Start-ups registered with the Department for Promotion of Industry and Internal Trade (DPIIT) were exempted from Angel Tax.
- Investments made by specified angel investors were also exempted.
- The valuation methods were clarified, and a mechanism for addressing valuation disputes was introduced.
These measures provided much-needed relief and clarity to start-ups and investors, encouraging more funding into the sector.
Considering the context of the question and the measures announced in Union Budget 2019 to encourage start-ups, the tax that was eased was the Angel Tax.
Why Other Options Are Not Applicable
- Entertainment tax: This tax is levied on entertainment services like movies, shows, etc. It is not directly related to encouraging start-ups in general.
- Corporate tax: While corporate tax rates affect businesses, the specific easing measure aimed at start-ups in the context of investment received was Angel Tax. Corporate tax reforms (like rate cuts) benefit all companies, not specifically easing a burden unique to start-up funding.
- Luxury tax: This tax is levied on luxury goods and services. It has no direct relevance to encouraging start-up growth.
Therefore, the specific tax eased in Union Budget 2019 to encourage start-ups was Angel Tax.
Revision Table: Union Budget 2019 Start-up Measures
| Tax Mentioned | Relevance to Start-ups & 2019 Budget |
|---|---|
| Angel Tax | Directly eased for DPIIT-registered start-ups and eligible investors in Union Budget 2019 to boost funding. |
| Entertainment tax | Not directly relevant to general start-up encouragement policies in the budget. |
| Corporate tax | General business tax; specific easing for start-up funding was Angel Tax, though corporate tax rates also impact profitability. |
| Luxury tax | Not relevant to start-up funding or general business operations. |
Additional Information: Indian Start-up Ecosystem
The Indian government has been actively promoting the start-up ecosystem through various initiatives like 'Start-up India'. These initiatives aim to provide funding support, simplify regulations, offer tax incentives, and build infrastructure for start-ups.
Easing taxes like Angel Tax is a crucial part of creating a favorable environment for start-ups to grow, innovate, and create jobs. It helps them raise necessary capital without facing punitive taxation on investments. This encourages both domestic and international investors to fund Indian start-ups.
Important Questions from Business and Economy
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।. There are a large number of buyers and sellers in the market.
II. Firms have free entry and exit in the market.
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