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The Finance Ministry has exempted investors from 21 countries including the US, UK and France from the levy of angel tax for non-resident investment in unlisted Indian startups. The list, however, excludes investment from countries like Singapore, Netherlands and Mauritius.
The notification by Central Board of Direct Taxes (CBDT) on May 24 comes after a press release issued on May 19, which had detailed the classes of investors exempted from the angel tax provision. Excluded entities include those registered with Sebi as Category-I FPI, Endowment Funds, Pension Funds and broad-based pooled investment vehicles, which are residents of 21 specified nations, including the US, UK, Australia, Germany and Spain, as per the notification.
Other nations mentioned in the notification are Austria, Canada, Czech Republic, Belgium, Denmark, Finland, Israel, Italy, Iceland, Japan, Korea, Russia, Norway, New Zealand and Sweden.
The CBDT notification is effective from April 1.
Bhavin Shah, Deals Leader at PwC India said, “This relaxation is a welcome step to ease foreign investments. However, the exemption for broad-based fund is provided for 21 countries, which exclude top jurisdictions like Singapore, Mauritius and UAE. These three countries together constitute over 50% FDI in India. Not including Singapore, Mauritius and UAE, keeps almost all significant PE / VC funds and start-ups in which they invest, on their toes for angel tax issue. These funds contribute close to 50% of foreign investment in the country today.”
Nangia Andersen India Chairman Rakesh Nangia said by explicitly mentioning this list of countries, the government aims to attract more foreign investment (FDI) into India from countries that have robust regulatory frameworks.
“This move aligns with the Government’s initial intention of bringing FDI under the purview of angel tax to prevent the circulation of unaccounted money. Therefore, exempting investments from regulated entities resident in countries with stringent and effective regulatory frameworks serves a logical purpose. Surprisingly, countries such as Singapore, Ireland, Netherlands, Mauritius etc from where majority of FDI is channelised into India, do not find a mention in this notification,” Nangia said.
Now, stakeholders will have to wait for a formal notification for valuation guidelines, for which five methods were outlined in the press release issued last week.
The Finance Act, 2023, had amended Section 56(2)(viib) of the Income-tax Act. The provision, colloquially known as the ‘angel tax’ was first introduced in 2012 to deter the generation and use of unaccounted money through the subscription of shares of a closely held company at a value that is higher than the fair market value of the firm’s shares.
The provision stated that when an unlisted company, such as a start-up, receives equity investment from a resident for issue of shares that exceeds the face value of such shares, it will be counted as income for the start-up and be subject to income tax under the head ‘Income from other Sources’ for the relevant financial year. With the latest amendment, the government had proposed to also include foreign investors in the ambit, meaning that when a start-up raises funding from a foreign investor, that too will now be counted as income and be taxable. The DPIIT-recognised startups were excluded from the angel tax levy.
